Since its inception, the National Pension Scheme (NPS) has made many user-friendly changes. The most recent of these is the introduction of the NPS Systematic Lump Sum Withdrawal (SLW) Facility, which allows users to gradually withdraw the non-annuitized portion of the corpus.
Another notable change is the facility to defer annuity purchases (for pension) until age 75. We argue that the NPS should also consider including the purchase of government bonds as an annuity option for retirees.
RBI Retail Direct is a portal that allows users to buy RBI, Central and state government bonds. These bonds offer interest payout twice a year and can be purchased for insanely long durations of up to 50 years! (20-30 years should be enough for most retirees). We have discussed the pros and cons of these bonds in detail before and shall only summarize here.
- RBI Retail Direct for govt bonds: Who should use it and who should not
- RBI Retail Direct: A look inside, how to register and what you can buy/sell
- How I used RBI Retail Direct to buy govt. Bonds and create an income source
Insurance annuity vs Govt Bonds
- Govt bonds offer the same interest rate regardless of age. Annuity rates depend on the option and age of the buyer. Older buyers better better rates as they are expected to die soon (and leave the money with the insurer).
- Govt bonds always return the principal to the nominee or legal heir. One must choose this option in annuities, but this would have the lowest rate!
- There are no life certificate hassles with government bonds, unlike annuities.
- Both products offer income to the surviving spouse (bonds can be held in joint mode), but annuities will offer a lower rate with this option.
NPS retirees must buy an annuity or pension product from an insurer (at least 40% of the corpus). One gripe about the NPS is that these products are not special. A person could buy these products without joining the NPS. There is no special interest rate for NPS subscribers. The NPS is said to be working on that.
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Govt bonds will naturally solve this problem as the interest rate would be higher than insurance annuities in many circumstances. The main disadvantage is that annuities might offer a better rate when purchased in the 70s (depending on the option chosen).
The government will only gain funds for their development projects via this route instead of the money going to the coffers of private players while offering the highest possible guarantee to the retiree. It is not easy (if not impossible) to sell the bonds mid-tenure. If that is such a worry for the NPS regulator, some restrictions can be imposed.
In summary, allowing NPS subscribers to purchase government bonds will have multiple benefits, such as higher interest rates, return of principal and less paperwork/hassle. Will it happen, though?