Last Updated on October 1, 2023 at 9:16 pm
Pension is an extremely important part of a personal retirement portfolio. Recent developments in the bond market have made it possible for a retail investor to buy long-term Government of India (GOI) bonds (different from RBI floating rate bond). It is time to ask if a GOI bond can be used for a pension and how it is different from the annuity offered by insurers like LIC.
By “LIC pension” we refer to annuity products from any insurance company. Also if a person has a compulsory pension via the govt PF or via NPS (for all) or via a company pension plan (usually via insurer) then the GOI bond option can be considered to supplement the pension.
Before we consider the pros and cons of GOI bonds and standard pension products, how does one buy GOI bonds? We had earlier mentioned details of this procedure in an eloquently(!) titled article: Do not buy Government Securities (G-sec) from retail platforms (Zerodha, NSE goBID). The “do not buy” refers to buying GOI bonds (for example, treasury bills or T-bills) for short-terms. As mentioned in this article, GOI bonds can be used for pension depending on an individual’s circumstances. So there is no disparity here.
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Some excerpts from this article: On 23rd Nov. 2017, RBI opened the G-sec market to retail investors by allowing them to participate in “non-competitive bidding” in government securities and T-bills. Subsequently, Zerodha coin launched its trading platform and NSE has come up with an app and online platform NSE goBID for retail participation in G-sec with a minimum investment of Rs. 10, 000 and multiples thereof up to 2 crores.
Thus multiple of Rs. 10,000 is a reasonable sum for a “middle-class” retail investor looking for regular income from GOI bonds. When RBI announces G-secs, the price is determined in an auction by banks and institutional investors (big players). While retail investors can now participate in this auction, they cannot bid for these bonds. The price allotted will be decided by the bids of the big players. This is referred to as non-competitive bidding.
Pension from GOI bonds: pros and cons
If you buy a GOI bond, you would receive the annual interest in two instalments (every six months). This interest payment is what is being referred to as a “pension” substitute in this article. This bond income is as secure as it gets, higher than a “LIC pension”.
The bond interest payout is taxable as per slab – the same as a conventional pension. However, the interest rate could be higher as there are no middle-men involved. That said, when you buy via NSE goBID, you may have to pay a price higher than the face value. This will bring down the effective return.
An insurance annuity is age-dependent. Younger the person, lower the payout. Bond income is independent of age. An annuity is typical for life and if one needs the principal back, the rate will be even lower.
GOI bond is for a fixed tenure but the tenure can be 20 or 30 or even 40 years. Which is as good as a lifetime for those in the evening of their lives. Besides the principal will always be returned back. Annuities offer pension to surviving spouse, but this would mean loss of principal.
Annuities require “proof of life” aka “life certification” each year. This can be a serious hassle (and health risk under the present conditions) in spite of fingerprint-based tech support available. GOI bonds have no such requirement.
This is an example of a long-term bond from the NSE go BID portal. A 40-year old bond with a payout of 6.8% for the entire tenure. Another 7.16% bond maturing in 2050 is also shown in the screenshot below.
- 680GS2060A – GS (6.80% GS 2060)
- Bidding Dates 22-Sep-2020 to 23-Sep-2020
- Price per Security 108.00
- RBI Auction Date 25-Sep-2020
Naturally, there is a premium of Rs. 15 per 7.16% bond that needs to be paid. Compared to an age-dependent lower rate from an annuity product, considering the return of principal, and absence of annual paperwork, it is reasonably justified to consider these. An exact point to point comparison between the two products may not be possible.
The catch is, they may not be available all the time, that too at attractive rates and the payout is every six months.
Those interested may register with the press information bureau of India for notifications from the finance ministry for details on new bond auctions. See this example circular notifying one of the above-mentioned bonds. Note emails will take up to a day to arrive because of their large list. You can also check with the NSE goBid portal (after registering).
Who should consider buying long-term GOI bonds?
- Anyone who has a significant retirement corpus but no conventional pension plan can consider this instead of an annuity. The assumption here is, they have enough liquidity from other savings and enough money invested to handle inflation in future.
- Those who need monthy income and cannot take the risk of a one in six months payout are better off with conventional annuity products (this was remarked in my earlier article on the topic too)
- Those who are looking to supplement their existing pension can also consider these.
- Senior citizen comfortable with the use of Demat account may find these products more endearing than others who have never touched direct equity.
How to register at NSE goBID
You will need a demat account, PAN, verified KYC and acceptable bank account.
- Go to the NSE go BID portal
- Scroll to see two dull orange buttons at the page bottom. One is for those with demat accounts with existing NSE trading members and one is for resident individuals holding other demat accounts. All popular demat providers should be NSE members.
- Once you enter relevant details, it will be verified with your existing demat KYC and account approved for bidding.
- The payment for the bid must be done from the same bank account linked with your demat.
In summary long-term, GOI bonds can be an excellent, secure income source for those who want periodic income but can still manage without crucially depending on it. While not everyone can opt for it instead of a convention pension (if there is a choice in the matter), GOI bond income can certainly be used as a pension supplement.
Please note that the above reasoning does not apply to buying short-term GOI bonds or money market bonds (T-bills). A simple liquid fund, money market fund or arbitrage fund can get the job done just as well and with lower tax outgo. For recommendation see: Handpicked List of Mutual Funds Oct-Dec 2020 (PlumbLine)
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