Varishta Pension Bima Yojana – Do Not Buy!

Budget 2015 removed the service tax associated with the Varishta Pension Bima Yojana which can be purchased up to 15th Aug. 2015.

If you* have only about Rs. 6,66,665/- (or less) to spare, and are aged 60 or above, then you can buy this plan to get a maximum monthly pension of Rs. 5,000 before taxes. If that is all you are going to earn, then you will not be paying taxes anyway.

  • you here refers to your entire family. That is, maximum purchase amt for you, spouse + dependents is Rs. 6,66,665. This is a bit unfair since the plan has only 'option' upon the death of the pensioner: return of purchase prices to spouse or nominee. When the retiree dies, the surviving spouse will be left with the purchase amt (devalued by inflation) to buy an annuity at a much lower rate.

If your monthly expenses are much higher than Rs. 5000 and you have a corpus that is worthy of your expenses, do not lock your money away in this or any annuity plan. In this plan, the lock-in period is 15 years.  The purchase price will not be returned before the lock-in period unless there is a critical or terminal illness for self or spouse.

If the retiree has a small corpus to begin with - small meaning it would last only a few years if withdrawn from it while the rest grows- then this Bima Yojana is better than say, a post office senior citizen scheme which offers a similar rate (quarterly compounded) but only for 5 years. There is a chance for reinvestment risk. That is the interest rate after 5 years could be lower. This is why people with low corpuses must lock into this Varishtha Bima Yojana. They will get a decent annuity rate at least until the death of the pensioner.

Retirees with much larger corpuses can do better with a combination of debt and equity  funds. For them, both the above products are not productive enough.

inflation-indexed annuity calculator
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Liquidity is a key component of investing. One that cannot be factored into an Excel calculation*. For a retiree with reasonable amount of assets, liquidity is gold.

* For the record, this applies to reinvestment risk as well!

Liquidity provides the freedom to expose the corpus to more volatile but potentially rewarding instruments (eg. various debt mutual funds). The idea should be to try and let parts of the corpus grow at a rate faster (on average) than the rate of withdrawal for as long as possible.

This is impossible if the retiree locks up portions of their corpus in annuity plans. Initially, the annuity/pension may prove sufficient. Down the line, thanks to actual inflation*, expenses will overtake the annuity.  To avoid this, the untouched corpus must grow at decent pace. This is possible only if the corpus is liquid enough. Also, this way you don't have to deal with annual life certification paperwork (which is a pain).

  • cost inflation(esp. in services which is independent of inflation indices) + inflation in service tax rate

If the retiree has a small corpus to begin with, one cannot take on too much risk.  In such cases, liquidity is secondary and this pension plan makes sense since a retiree with not much corpus to play with, cannot spend too much anyway and is unlikely to pay out any tax.

This plan is meant only for such people. Do not buy this plan if you don't fit this profile. People who do fit this profile are unlikely to be reading this!

Do not get swayed by the high annuity rate and the lack of service tax. They don't mean much.  This product is meant for the really low-income group. A tax-free bond is a relatively better option(only relatively), if you have some money to spare, believe in the misleading notion of 'steady income' , and can stomach some credit risk (after analyzing the companies balance sheet history).

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16 thoughts on “Varishta Pension Bima Yojana – Do Not Buy!

  1. dipak jambusaria

    even if one has corpus which is high ; a part is always locked in debt for steady income. Here u are assured of 9% or interest rate for life long irrespective of interest rate movement. Hence instead of putting in fd or sr citizen which gives similar return would it be not worth to put in this scheme

    Reply
  2. dipak jambusaria

    even if one has corpus which is high ; a part is always locked in debt for steady income. Here u are assured of 9% or interest rate for life long irrespective of interest rate movement. Hence instead of putting in fd or sr citizen which gives similar return would it be not worth to put in this scheme

    Reply
  3. Jaideep Shirali

    In the current context this scheme is a safe option to FDs, considering that company FDs are riskier and that very few options are available for a fixed rate for long durations. It is useful specially to senior citizens who are in their early 60s, keeping in mind that they live till 75-80, a duration of 10-15 years. It can be surrendered at 98% value upto 15 years and a loan is available after 3 years. I find it useful mainly in terms of fixed income, for better returns there are other products.

    Reply
    1. freefincal

      When it comes to retirement, 'safe' is measured only in terms of how much you have to invest and inflation. The 'current context' does not help. Locking 6L in this policy when the monthly expense reqd is much higher than 5K is a waste.

      Reply
  4. Jaideep Shirali

    In the current context this scheme is a safe option to FDs, considering that company FDs are riskier and that very few options are available for a fixed rate for long durations. It is useful specially to senior citizens who are in their early 60s, keeping in mind that they live till 75-80, a duration of 10-15 years. It can be surrendered at 98% value upto 15 years and a loan is available after 3 years. I find it useful mainly in terms of fixed income, for better returns there are other products.

    Reply
    1. freefincal

      When it comes to retirement, 'safe' is measured only in terms of how much you have to invest and inflation. The 'current context' does not help. Locking 6L in this policy when the monthly expense reqd is much higher than 5K is a waste.

      Reply
  5. Vishal Rochlani

    If the Customer is conservative then he can definitely go for this pension scheme as the Interest Rate is guaranteed for long term. It is better to for this scheme rather than FD or Sr. Citizen if given an option.

    Reply
  6. Vishal Rochlani

    If the Customer is conservative then he can definitely go for this pension scheme as the Interest Rate is guaranteed for long term. It is better to for this scheme rather than FD or Sr. Citizen if given an option.

    Reply
  7. Pattabiraman Murari

    When it comes to retirement, ‘safe’ is measured only in terms of how much you have to invest and inflation. The ‘current context’ does not help. Locking 6L in this policy when the monthly expense reqd is much higher than 5K is a waste.

    Reply
  8. Pattabiraman Murari

    When it comes to retirement, ‘safe’ is measured only in terms of how much you have to invest and inflation. The ‘current context’ does not help. Locking 6L in this policy when the monthly expense reqd is much higher than 5K is a waste.

    Reply
  9. sundararajan

    I agree with you. This scheme is only for low income or poor people. But even for them, Rs5k limit is too low for monthly income and that too taxable? To provide a decent income for old people who have no pension, either limit should be increased or at least each spouse should be allowed to invest separately similar to PPF and income should be non taxable. But if one has income of Rs10k only, it will be non taxable anyhow.

    Reply
  10. sundararajan

    I agree with you. This scheme is only for low income or poor people. But even for them, Rs5k limit is too low for monthly income and that too taxable? To provide a decent income for old people who have no pension, either limit should be increased or at least each spouse should be allowed to invest separately similar to PPF and income should be non taxable. But if one has income of Rs10k only, it will be non taxable anyhow.

    Reply

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