Pradhan Mantri Vaya Vandana Yojana (PMVVY) was announced by the government in Budget 2017. The ambitious scheme aims to provide social security to the senior citizens. PMVVY works on the similar lines of the erstwhile Varishtha Pension Bima Yojana (VPBY) launched by the government during 2014-15.
The similarity is on account of both plans being single premium payment schemes. However, PMVVY differs from VPBY on the rate of return and number of annuity payments. VPBY promised 9% rate of return and a life-long pension. But PMVVY assures a fixed rate of return of only 7.4%. Moreover, the life-long pension payment has been done away with.
Now, PMVVY would provide you with a pension for fixed period of 10 years. You may choose to receive the pension on a monthly, quarterly, half-yearly or annual basis. The minimum age to become eligible for availing of the scheme benefits is 60 years. Unlike general pension plans, there’s no upper age limit for participation.
You may purchase the plan from LIC of India which is the administrator of the pension scheme. PMVVY is going to be a contract between LIC (the annuity provider) and you (the annuitant). The plan is available for subscription until 31st March 2023.
The pension to be received is subject to minimum and maximum limits as given in the below table.
Ceilings have been placed on the pension amount that the entire family may receive under PMVVY. On the whole, the PMVVY pension amount of the family should not exceed the maximum pension limits specified in the policy. Family for the purpose of the scheme consists of the annuitant, his/her spouse and dependents.
These circumstances include money required for treatment of the critical illness of annuitant or spouse. Upon surrender, you will receive 98% of the purchase price.
A loan facility is also available on PMVVY. However, you may avail loan facility only after 3 policy years have been completed since inception. You are eligible for a loan of up to 75% of the purchase price. Interest on the loan will be recovered by deductions from the pension amount.
1. During the Policy Tenure
You are going to receive a fixed amount of pension for the entire tenure of 10 years. The pension will be credited to your account at the end of each period. The term relates to the mode chosen by you at the inception. In case you have selected a monthly pension mode, then at the end of one month from policy commencement, you will receive your pension.
In this era of gradually falling interest rates, PMVVY can bring some hope to senior citizens. Whatsoever be the prevailing interest rates, you are assured of 8% guaranteed rate of return. The effective annual yield comes to around 8.3%.
2. Death Benefits
PMVVY has got embedded death benefits like any regular endowment plan. It assures of the dependents leading a comfortable life when you won’t be around. Upon your demise during the policy tenure, the entire purchase price will be refunded, to your nominee or legal heirs.
3. Maturity Benefits
VPBY used to provide only death benefits whereas maturity benefits were not available. PMVVY is an improved version of VPBY. PMVVY provides maturity benefits over and above death benefits.
When you survive the entire tenure of PMVVY i.e. 10 years, you receive maturity benefits. The maturity benefits consist of purchase price along with the final instalment of the pension.
Suitability of PMVVY as an Investment
1. Liquidity Issues
As you age, you may become highly susceptible to health-related problems. In such a scenario, you need to possess ample liquidity by your side to meet necessary medical expenditures. PMVVY lacks liquidity aspect which makes it an unsuitable investment product.
You are allowed to surrender the policy but only upon the expiry of the lock-in period of 3 years. Secondly, you can surrender only for the treatment of critical illnesses. It’s an impediment to having access to your hard-earned money when you are in dire need.
2. Low rate of return
The pension plan promises an 8% rate of return irrespective of the interest rates around. But do you think this rate is good enough to beat inflation?
I don’t believe it! Inflationary pressures are going to get even harder as you approach retirement. A meagre 8% won’t be able to match the inflation leave aside beating it. Additionally, post-tax returns are going to be even lower drilling a hole in your pocket.
You need to explore better inflation-countering investments to bag higher returns than this.
Whenever you invest in pension products, you expect some tax incentives. But forget about tax efficiencies as regards PMVVY. You don’t get any income tax exemptions on your PMVVY contributions. Moreover, the pension received regularly is taxable in your hands.
You can try other low-risk investment options that give tax benefits. Some of them are debt mutual funds or tax-free bonds.
4. Inadequate pension amount
There exist many senior citizens who don’t have any other income streams except pension post-retirement. Some may not have even that also and might have to work beyond 60 years of age. In such a scenario, PMVVY gives a pension which looks highly inadequate. The conditions of PMVVY are somewhat antithetic to comfortable retired life.
The maximum amount of pension available is only Rs 5000. If some family members are registered in PMVVY, then the total pension can’t exceed Rs 5000. To support a family of 3-4 members, this amount is highly insufficient.
You need to have a pretty good corpus to lead a peaceful retired life. However, this can’t be possible with PMVVY.
Though the PMVVY scheme is not a viable retirement planning option as it is tax-inefficient and gives a low return, you may consider it if you are risk-averse and want to invest only in safe avenues. Also, the impact of interest rate change will be minimal for this scheme.
However, if you want to access your retirement corpus anytime or expect better returns, you can explore better investment avenues such as the Post Office Senior Citizen Savings Scheme, Post Office MIS Scheme, 8% Government of India bonds, hybrid balanced mutual funds and Non-Convertible Debentures.
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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