A good bet for lower middle class

Scheme aimed at providing financial security to people in the unorganised sector

Given the general lack of steady income options, post-retirement, especially for the lower middle class and the unorganised segment, the Atal Pension Yojana (APY) is a good bet. The APY scheme guarantees a monthly pension of up to ₹5,000 for those who make monthly contributions during their working life.

APY, launched by the Centre in 2015, was aimed at providing financial security to people in the unorganised sector during their post-retirement life. However, any citizen of India with a savings bank or post office account can invest in the APY. The age of the subscriber should be 18-40 years.

The government has ‘co-contributed’ up to 50% of the premium for five years for those who joined the scheme between June 1, 2015 and March 31, 2016 and were not beneficiaries of any social security schemes, besides not being income-tax payers.

Advantages of the scheme

The APY gives a pension that is guaranteed by the government. The subscribers will get a pension of ₹1,000, ₹2,000, ₹3,000, ₹4,000 or ₹5,000 per month on attaining the age of 60, depending on the contributions made by them. Most banks and post offices allow you to open an account online or offline. An app is also available to track your balance and transactions.

The monthly contribution to APY is modest — from a low of ₹42 a month for an 18-year-old desiring a pension of ₹1,000, to a maximum of ₹1,454 a month for a 40-year-old seeking ₹5,000 as monthly payout.

On death of the subscriber (after the age of 60), the pension will go to his/her spouse. In case of death of both the subscriber and spouse, the pension corpus will be given to the nominee. On death of the subscriber before attaining 60, the spouse will be given the option either to withdraw fully or to continue paying premium for the balance period (original subscriber’s 60th birthday) and then avail of the pension benefit. Contributions to APY are eligible for the same tax benefits that the National Pension System (NPS) enjoys. Apart from the ₹1.5-lakh deduction under Section 80CCD(1), the premium paid in APY can get an additional deduction of up to ₹50,000 under Section 80CCD(1B) of the Income Tax Act. However, the pension receivable is taxed as per the income tax slab of the subscribers.

A similar scheme — the ‘Pradhan Mantri Shram-Yogi Maan-dhan’ (PMSYM) — was announced in the Budget 2019 to provide an assured monthly pension of ₹3,000 only to workers in the unorganised sector who earn up to ₹15,000 per month. The premium under the PMSYM is relatively lower than the APY’s.

Inflation-beating returns

The government guarantees returns under the APY at 8%, which is higher than the prevailing CPI inflation in recent years.

Assuming that the annual inflation stays at around 5%, the returns are relatively attractive. The ₹5,000 pension after 20 years would be worth ₹1,884 in present value. If inflation is higher, it would reduce the real effective return.

UTI, SBI and LIC manage the APY corpus of around ₹6,860 crore (as of March 2019). In four years since their launch, these APY funds, managed by UTI, SBI and LIC, generated compounded annualised returns (CAGR) of 9.1, 8.4 and 8.8% respectively. Such excess returns will be passed on to the subscriber.

These funds invest the APY corpus in equity, government securities and corporate debt instruments. The exposure to equity for these funds is in the 11-15% range.

Costs involved in maintaining the APY account are similar to that of the NPS.

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