Pradhan Mantri Vaya Vandana Yojana - Attractive option for young retirees

Park a portion of your surplus in the Pradhan Mantri Vaya Vandana Yojana pension scheme

Senior citizens who have completed 60 years of age and are looking for regular pension have more reason to cheer now. Pradhan Mantri Vaya Vandana Yojana (PMVVY), a pension scheme launched by the Government and operated by the LIC, was slated to close in May 2018, but will now accept investments till March 2020. The maximum amount that can be invested under the scheme has been doubled to ₹15 lakh.

In July 2017, the Centre launched the PMVVY scheme with the intent of providing senior citizens steady cashflows to meet their familial expenses, post-retirement. Besides providing monthly pay out, the scheme offers attractive interest rates, since it is sponsored by the government.

The effective interest rate varies between 8 (monthly pay out) and 8.3 per cent (annual pay-out) per annum. This is higher than the current 7-7.5 per cent annual interest on the fixed-deposit schemes run by banks (public and private) for senior citizens.

Who is eligible?

Senior citizens who have completed 60 years of age are eligible to subscribe to the scheme. There is no limit on the maximum age of the individual looking to invest in the scheme.

Benefits

The scheme has a tenure of 10 years. From the time they enrol till the date of maturity, the individual shall receive regular pay-outs. Individuals can decide on the frequency of the pay-outs — monthly, quarterly, half-yearly or annual.

The minimum and maximum investment (also referred to as purchase price) and the quantum of pension vary with the frequency of pay-outs.

For instance, if you opt for a monthly pay-out, the minimum investment in the scheme is ₹1.5 lakh, for which the monthly pension will be ₹1,000. The maximum investment in the monthly option has been capped at ₹15 lakh, for which the maximum monthly pension will be ₹10,000.

If you wish to receive the pension on a quarterly basis, the minimum purchase price is ₹1.49 lakh and the quarterly pension in that case will be ₹3,000. The maximum you can invest is ₹14.9 lakh, which will fetch you a quarterly pension of ₹30,000.

For a half-yearly pension, you need to invest a minimum of ₹1.47 lakh, for a pension of ₹6,000. The maximum investment in the half-yearly plan is ₹14.7 lakh; the pension will be ₹60,000.

In case you don’t need regular pension to meet your family running expenses, you can opt for an annual pay-out. The minimum investment is lower at ₹1.44 lakh, with an annual pension pay-out of ₹12,000. The maximum investment in this case is ₹14.45 lakh, for an annual pension of ₹1.2 lakh.

Maturity

If the pensioner survives the policy term, she is entitled to receive the investment principal along with the final pension instalment.

However, if you need money midway, you cannot close the policy, unless you seek money to meet medical expenses for critical or terminal illness, either for yourself or your spouse; in that case, you will get 98 per cent of the purchase price. On the death of the pensioner during the policy term of 10 years, the purchase price will be refunded to the beneficiary.

Though the scheme does not offer the flexibility to close or withdraw money before maturity, , one can get the loan facility on completion of three years. Individuals can borrow up to 75 per cent of the purchase price.

For loans sanctioned up to April 2018, the interest per annum is 10 per cent, payable half-yearly till the tenure of the scheme, which is higher than the 8-9 per cent interest for secured loans.

The loan interest will be recovered from the pension payable, and the principal, if any, will be recovered from the proceeds at the time of maturity.

The lock-in period of 10 years is the only disadvantage of this scheme. However, given that interest rates are likely to head down in the medium-to-long term, it may be a good idea to park a portion of your surplus that you will not need for the next 10 years, in this scheme.

This may best suit young retirees who can augment their pension with other income sources.

The writer is co-founder, Rana Investment Advisors.

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