It is a tough time for senior citizens, at least for those who parked their money in Fixed Deposits (FDs). Banks are lowering FD interest rates, and monthly income of the senior citizens is fast shrinking as their interest income falls.
State Bank of India, the country's largest lender, has lowered interest rates for retail domestic term deposits below Rs 2 crore by 5-75 basis points. Punjab National Bank (PNB) has lowered the interest rates by up to 50 basis points on maturity periods between 7-14, 15-29, 30-45, 46-90 and 91-179 days. Several private sector banks followed suit in lowering FD rates. Senior citizens, who largely rely on FDs for interest income, are feeling the pinch. A 10 bps (0.10%) cut in FD rates means that a retired person earning Rs 2.33 lakh a year from Rs 35 lakh FDs can earn Rs 2.29 lakh. For those with Rs 50 lakh FDs, the decline in annual income is Rs 6,000 from Rs 3.33 lakh to Rs 3.27 lakh.
Unfortunately, FD interest rates have not fallen by just 10 bps. The decline is a bigger. In February 2014. for a FD tenure between one and two years, SBI used to offer 9% for normal citizens. Today, it offers 6.8% only --- a full 220 bps cut. This means a person with Rs 50 lakh FDs, earning Rs 4.65 lakh interest income will now earn Rs 3.48 lakh, a drop of over Rs 1.1 lakh. How does a senior citizen who has no income manage the shortfall of Rs 1 lakh?
Thanks to the Reserve Bank of India (RBI), interest rates have been falling. While loans have become cheaper, FD rates are falling. The RBI is likely to cut rates this Wednesday for a fourth time in 2019. Costs are rising. Medical healthcare has become frightfully expensive. There is no social security net for senior citizens in the country. There is no pension cushion for those employed in private sector. Schemes like NPS and Atal Pension Yojna are new. This means for senior citizens who depend on bank FDs for income, the one-trick pony is no longer working!
What do they do? Senior citizens can no longer hide behind FDs for income. If they have to be street-smart, they need to consider other options available.
Senior Citizens' Savings Scheme
One option is Senior Citizens' Savings Scheme (SCSS). One can invest a maximum of Rs 15 lakh in SCSS. Senior Citizens' Savings Scheme gives them an interest rate of 8.6% per annum, but for Rs 15 lakh deposit in SCSS one can get only Rs 32,250 quarterly interest (Rs 1.29 lakh). If one is looking at an annual income of over Rs 1.29 lakh, consider Pradhan Mantri Vaya Vandana Yojana (PMVVY), a pension scheme launched by the government in July 2017. Parking money in PMVVY and SCSS could be the right choice.
Pradhan Mantri Vaya Vandana Yojana
PMVVY is offered through the Life Insurance Corporation of India (LIC). The scheme is open for subscription till March 2020, and one can invest up to Rs 15 lakh. Depending on the frequency (monthly, quarterly, half-yearly or annual), you could get Rs 1.2 lakh annually as pension. This means you can get Rs 2.49 lakh as annual income with a combination of SCSS and PMVVY by investing Rs 30 lakh. In comparison if you park Rs 30 lakh in FDs, you can get about Rs 2.2 lakh i.e. Rs 29,000 less or roughy Rs 2,400 lower per month.
RBI Savings Bond
If a senior citizen aims for over Rs 2.5 lakh, a safe option with reasonable returns could be RBI Savings Bond. Also known as 7.75% Savings (Taxable) Bonds, RBI Savings bonds have a tenure of seven years and come with cumulative and non-cumulative options. If you are looking for periodic income, the non-cumulative option, with its attractive interest rate and half-yearly interest payments, is a good choice for senior citizens. It offers an interest rate of 7.75% per annum. This is better than what the private sector and public sector banks offer.
Annuity is offered by life insurance companies. Annuity is a plan that helps you to get a regular payment for life after making a lump sum investment. The life insurance company invests the money of the investor and pays back the returns generated from it. Immediate annuity plans, offered by many insurers, start working right from the vesting phase. It is purchased with a lump sum and the annuity payment starts immediately either for a limited tenure or lifetime. You will get regular (monthly/quarterly/yearly) annuity payouts from the scheme till you are alive. By investing Rs 15 lakh, a 60-year old male can earn Rs 1.22 lakh, which is comparable to returns from Senior Citizens' Savings Scheme and Pradhan Mantri Vaya Vandana Yojana.
The higher is your age, the bigger is the annuity amount. For instance, a 65-year old will get Rs 1.4 lakh annually while a 70-year old will get Rs 1.57 lakh per year. The maximum age for buying an annuity is usually 100 years. There is maximum cap on annuity purchase, which means one can easily invest big sums like Rs 50 lakh or Rs 1 crore in annuities. Do note that the fate of the annuity after policy holder’s death depends on the choice exercised by policyholder while buying the plan. So, understand the choices and exercise them carefully. Once made, the choice cannot be changed. (The author is a journalist with 14 years of experience)