- Date : 27/06/2020
- Read: 6 mins
Have a look at these investment options that have been modeled for retired people keeping in mind high returns and less risk
Post the age of 60, most people lose an active source of income, unless they are freelancing or providing consultancy services. As a retiree, it is important for one to build an investment portfolio that ensures a steady source of income with minimal risk to the capital invested.
The government has introduced a few investment options that offer tax benefits for senior citizens. Private financial institutes too have products that benefit the elderly. As a senior citizen, here are six options you could consider for your investment mix:
1) Senior Citizens’ Saving Scheme (SCSS)
Specifically for those above the age of 60, this government-sponsored savings scheme offers a simple and safe long-term saving method. An SCSS can be opened at any authorised bank or post office in India and one can invest any amount up to a maximum of Rs. 15 lakh in multiples of Rs. 1000.
The tenure of the investment is five years, and upon maturity can be subsequently extended for another three years. Premature withdrawals are allowed after a year of investment, albeit with withdrawal charges.
The current yield on SCSS deposits is 8.3%, which is higher than returns from other debt instruments. Besides, the returns are eligible for tax benefits under Section 80C.
Related: Tax benefits after retirement
2) Post Office Monthly Income Scheme (POMIS)
Established under the purview of the Finance Ministry, this is a good option for retirees who have a lump sum amount to invest and are looking for a stable, regular source of income.
One can start with a sum of Rs. 1500, going up to Rs. 4.5 lakh individually or Rs. 9 lakh jointly with up to two other joint account holders. The tenure of the investment is five years. On maturity, you can withdraw the capital or reinvest it for another five years.
Currently offering a monthly payout at 7.7%, MIS beats returns offered by fixed deposits. However, it doesn’t offer any tax benefits.
Related: 5 ways to start investments even if you don’t have money right now
3) Pradhan Mantri Vaya Vandana Yojana (PMVVY)
To protect the income of senior citizens from fluctuating market conditions, the Government of India has introduced PMVVY through Life Insurance Corporation (LIC) as a limited period offering.
The scheme provides an assured pension at a rate of 8% per annum for 10 years. Subscription to the scheme was originally supposed to close in May 2018, with a maximum investment cap of Rs. 7.5 lakh per person. However, the upper limit has been bumped up to Rs. 15 lakh and senior citizens now have the option of investing until March 31, 2020.
The policy can be prematurely surrendered only under exceptional circumstances, such as a medical emergency. Loan on the policy can be availed of up to 75% of the investment, and deposits under the scheme are exempt from income tax under section 80C.
Related: 7 Government schemes to aid economic development and financial stability that you can benefit from
4) National Pension Scheme (NPS)
Another government-sponsored pension scheme, NPS allows subscribers to make regular contributions, starting with a minimum of Rs. 6000 per year, to a pension account during their working life. On retirement, subscribers can withdraw a partial amount in a lump sum and use the balance funds to buy an annuity to secure a regular post-retirement income.
NPS is a hybrid investment with an 80:20 debt-to-equity ratio. Presently, one can choose from eight different registered pension fund managers.
Thanks to the equity component, the yield on NPS is a little more attractive, with the interest being anywhere between 10% and 14%.
Related: As an NPS subscriber, you may now be able to invest more in equities. What does this mean?
5) Fixed Deposits (FD) / National Savings Certificates (NSC) / Tax Free Bonds (TFB)
All the three options mentioned here are fixed income instruments. While banks, post offices, and other financial institutions offer term deposits, NSCs and TFBs are offered via government schemes or state-owned corporations.
Usually the go-to investment option for most Indians, these debt instruments lack liquidity. The yield on fixed income securities keep changing depending on economic fluctuations.
One can invest in an FD for varying periods from 7 days to 10 years. NSCs are available via the post office for terms of 5 and 10 years. TFBs have a longer gestation period with a lock-in of 10, 15, or 20 years. It is important to factor the lock-in period before taking a call.
Most banks offer an additional interest of 0.25% to 0.50% per annum to senior citizens, which puts the current yields on most FDs between 6.5% and 7.75%. This is marginally lower than an NSC, which offers about 8.1%. Comparably, long-term TFBs yield between 8.1% and 8.4% per annum.
Related: FAQs about Fixed Deposits
6) Mutual Funds (MF)
Most fixed income options just barely beat the inflation rate; hence it’s important to consider some equity allocation as well. MFs deliver higher inflation-adjusted returns than other assets.
Investing in funds that have a higher debt-to-equity ratio will generate stable returns. Those with a higher risk appetite can consider balanced or large-cap funds. Unlike the other investment options, MF investors cannot remain completely passive; some monitoring of funds will be necessary.
Mutual funds too offer some systematic withdrawal plans and debt funds for those who are averse to equity allocation. Debt funds provide a greater flexibility for redemption and are taxable at 20% vis-à-vis term deposits that are taxable at 20% or 30% depending on the individual’s tax slab.
Related: Types of mutual funds and how to start investing in them.
Conclusion
Investment planning for post-retirement income has to be strategically managed to maintain a preferred lifestyle, generate a regular stream of cash, and allow enough leeway for other planned or unplanned expenses such as holidays, medical emergencies, etc.
An ideal portfolio requires a mix of fixed income and market-linked investments. The ratio would depend on your personal goals and risk appetite.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or insurance or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
Post the age of 60, most people lose an active source of income, unless they are freelancing or providing consultancy services. As a retiree, it is important for one to build an investment portfolio that ensures a steady source of income with minimal risk to the capital invested.
The government has introduced a few investment options that offer tax benefits for senior citizens. Private financial institutes too have products that benefit the elderly. As a senior citizen, here are six options you could consider for your investment mix:
1) Senior Citizens’ Saving Scheme (SCSS)
Specifically for those above the age of 60, this government-sponsored savings scheme offers a simple and safe long-term saving method. An SCSS can be opened at any authorised bank or post office in India and one can invest any amount up to a maximum of Rs. 15 lakh in multiples of Rs. 1000.
The tenure of the investment is five years, and upon maturity can be subsequently extended for another three years. Premature withdrawals are allowed after a year of investment, albeit with withdrawal charges.
The current yield on SCSS deposits is 8.3%, which is higher than returns from other debt instruments. Besides, the returns are eligible for tax benefits under Section 80C.
Related: Tax benefits after retirement
2) Post Office Monthly Income Scheme (POMIS)
Established under the purview of the Finance Ministry, this is a good option for retirees who have a lump sum amount to invest and are looking for a stable, regular source of income.
One can start with a sum of Rs. 1500, going up to Rs. 4.5 lakh individually or Rs. 9 lakh jointly with up to two other joint account holders. The tenure of the investment is five years. On maturity, you can withdraw the capital or reinvest it for another five years.
Currently offering a monthly payout at 7.7%, MIS beats returns offered by fixed deposits. However, it doesn’t offer any tax benefits.
Related: 5 ways to start investments even if you don’t have money right now
3) Pradhan Mantri Vaya Vandana Yojana (PMVVY)
To protect the income of senior citizens from fluctuating market conditions, the Government of India has introduced PMVVY through Life Insurance Corporation (LIC) as a limited period offering.
The scheme provides an assured pension at a rate of 8% per annum for 10 years. Subscription to the scheme was originally supposed to close in May 2018, with a maximum investment cap of Rs. 7.5 lakh per person. However, the upper limit has been bumped up to Rs. 15 lakh and senior citizens now have the option of investing until March 31, 2020.
The policy can be prematurely surrendered only under exceptional circumstances, such as a medical emergency. Loan on the policy can be availed of up to 75% of the investment, and deposits under the scheme are exempt from income tax under section 80C.
Related: 7 Government schemes to aid economic development and financial stability that you can benefit from
4) National Pension Scheme (NPS)
Another government-sponsored pension scheme, NPS allows subscribers to make regular contributions, starting with a minimum of Rs. 6000 per year, to a pension account during their working life. On retirement, subscribers can withdraw a partial amount in a lump sum and use the balance funds to buy an annuity to secure a regular post-retirement income.
NPS is a hybrid investment with an 80:20 debt-to-equity ratio. Presently, one can choose from eight different registered pension fund managers.
Thanks to the equity component, the yield on NPS is a little more attractive, with the interest being anywhere between 10% and 14%.
Related: As an NPS subscriber, you may now be able to invest more in equities. What does this mean?
5) Fixed Deposits (FD) / National Savings Certificates (NSC) / Tax Free Bonds (TFB)
All the three options mentioned here are fixed income instruments. While banks, post offices, and other financial institutions offer term deposits, NSCs and TFBs are offered via government schemes or state-owned corporations.
Usually the go-to investment option for most Indians, these debt instruments lack liquidity. The yield on fixed income securities keep changing depending on economic fluctuations.
One can invest in an FD for varying periods from 7 days to 10 years. NSCs are available via the post office for terms of 5 and 10 years. TFBs have a longer gestation period with a lock-in of 10, 15, or 20 years. It is important to factor the lock-in period before taking a call.
Most banks offer an additional interest of 0.25% to 0.50% per annum to senior citizens, which puts the current yields on most FDs between 6.5% and 7.75%. This is marginally lower than an NSC, which offers about 8.1%. Comparably, long-term TFBs yield between 8.1% and 8.4% per annum.
Related: FAQs about Fixed Deposits
6) Mutual Funds (MF)
Most fixed income options just barely beat the inflation rate; hence it’s important to consider some equity allocation as well. MFs deliver higher inflation-adjusted returns than other assets.
Investing in funds that have a higher debt-to-equity ratio will generate stable returns. Those with a higher risk appetite can consider balanced or large-cap funds. Unlike the other investment options, MF investors cannot remain completely passive; some monitoring of funds will be necessary.
Mutual funds too offer some systematic withdrawal plans and debt funds for those who are averse to equity allocation. Debt funds provide a greater flexibility for redemption and are taxable at 20% vis-à-vis term deposits that are taxable at 20% or 30% depending on the individual’s tax slab.
Related: Types of mutual funds and how to start investing in them.
Conclusion
Investment planning for post-retirement income has to be strategically managed to maintain a preferred lifestyle, generate a regular stream of cash, and allow enough leeway for other planned or unplanned expenses such as holidays, medical emergencies, etc.
An ideal portfolio requires a mix of fixed income and market-linked investments. The ratio would depend on your personal goals and risk appetite.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or insurance or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
