A decade or so ago, when someone wanted regular income, you assumed they were senior citizens or had retired early. That is no longer the case. With many shifting from a salaried existence to freelancing or enterprise, the need for regular income from accumulated wealth as a cushion has become important.
Let us discuss the investment options available for this purpose. We assume the person has a corpus to invest and obtain regular income. We exclude options like rental income (not possible/practical unless the property existed before), stock dividends (not possible unless the portfolio is old and significant), and systematic withdrawal plans (which will erode the principle and may not always be suitable).
1 Senior Citizen Savings Scheme
As the name suggests, one must either be 60 years or above on the account opening date or 55 years or more but less than 60 years and have retired under Superannuation, VRS or Special VRS. Retired Defence Services personnel (excluding Civilian Defence Employees) may open an account upon attaining the age of fifty years.
The interest payout is quarterly, and the maximum investment limit is Rs. 30 lakhs per person (so a couple can invest Rs. 60 lakhs). The downside is that the tenure is only five years, and the interest will differ upon renewal. This has a sovereign guarantee.
2 Post Office Monthly Income Scheme
Anyone can buy these. The payout is monthly. The maximum amount in a single account is Rs. 9 lakhs and Rs. 15 lakhs in a joint account. The interest would be lower than the senior citizen savings scheme. The duration is again five years. This has a sovereign guarantee.
3 Fixed Deposits Monthly Income Scheme
Banks and financial institutions issue these. The guarantee in the case of banks is limited to the deposit insurance limit and not applicable to financial institutions. The higher the rate offered, the more wary buyers should be.
4 Insurance Immediate Annuity Plans
These come with many options – How Annuity Plans Work – and anyone above 35 or 40 can opt for these. Unless the person is a senior citizen or has a small corpus to work with, these are not recommended before retirement. The higher the age of entry, the higher the interest rate. So it would be favourable to buy these well into retirement.
It must be remembered that the option favouring the insurer will have a higher interest rate. For example, they get to keep the initial corpus upon the death of the subscriber. Also, see Higher annuity rates of LIC Jeevan Akshay applicable from Feb 2023.
5 Government Bonds via RBI Retail Direct
RBI Retail Direct – a facility that allows retail investors to open a gilt security account with the RBI and purchase government securities (gilt bonds or gilts) in the primary and secondary market without a fee – was launched on Nov 12 2021.
Retail investors can buy bonds in the primary market (after a bond is issued) via a process known as non-competitive bidding. When RBI announces G-secs, banks and institutional investors (big players) determine the price in an auction. While retail investors can now participate in this auction, they cannot bid for these bonds. The bids of the big players will decide the price allotted.
RBI Retail Direct allows the sale of the bonds mid-tenure via CCIL India’s NDS-OM (Negotiated Dealing System – Order matching segment). The entire process of registration and use is completely online and can be linked with a savings bank account. RBI has published the full scope of RBI Retail Direct.
Also see:
Bonds vs. Annuities.
- Bonds pay interest twice a year and not monthly. Such a cash flow pattern may not be suitable for some. Annuities require proof of life each (life certification), while bonds do not need it.
- Bonds always return the principal to the self or nominee, while annuities provide a choice. The pension from the return of purchase price option is considerably lower!
- So, you will have to pay the insurer more to get the same pension as a bond or a simple annuity for life if you want the principal back.
- At a young age (how young depends on prevailing yields and rates), bonds may offer a higher income than annuities. Older retirees may get a better deal with annuities. See: What are the annuity rates of LIC Jeevan Akshay VII from Feb 2022?
- Annuities are subject to 18% GST, while bonds are not.
- Both options are illiquid. That is, you cannot get your money back after you have purchased a bond or an annuity (certain choices). At the time of writing, RBI Retail Direct purchases will not show up in your demat account for sale in the secondary market. Even if it does in the future, the retail bond market is immature and getting a buyer at the price we want would be tough.
- Bonds can be held jointly with the spouse. This ensures income to the younger spouse (assuming the bong has a long enough tenure). Annuities offer income for the lifetime of the surviving spouse.
- A retiree can consider buying a bond for the first annuity if it offers a higher yield and then buy single/joint annuities (simple choices as mentioned above) after a decade or so when the rates would be higher.
In summary, younger retirees or income seekers can consider RBI bonds. In contrast, senior citizens can consider a mix of traditional income-generating instruments and bonds, depending on the corpus size.
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