LIC has launched a Varishta Pension Bima Yojana.

This is a subsidised (as the ad says) pension plan perhaps owned by the Government and governed by LIC of India.

I am not a big supporter of LIC and would personally not be investing in this (I am not yet 60 years old) but the scheme seems to be good for people obsessed with bank fixed deposits.

The features are simple and easy to understand – you invest any amount ranging from Rs. 66, 665 to 6,66,665 and you will get a pension from that amount. The pension could be got on a regular basis – monthly, quarterly, half yearly or yearly. I would suggest taking the money on a monthly basis. Once the money is automatically credited to your account, you could do a SIP of that amount into an equity fund like say Franklin India Blue Chip fund.

Why Varishta when banks also pay around the same amount of interest?

Because this is tied up for life. Say 10 years later interest rates are at 4% p.a. at least a portion of your money would have been tied in at 9% p.a. I know people (like my dad!!) who are tied into a LIC plan for Rs. 12% – albeit a small amount, but it is nice. I EXPECT INTEREST RATES TO GO SOUTH OVER THE NEXT SAY 5 YEARS, and this could look good.

If it is taxable, why invest in Varishta?

All interest income / annuity income is taxable – so Varishta is also taxable. No point cribbing about the tax. If you are a person with more than taxable income, you will pay tax at your marginal rate.

How is it different from a bank fixed deposit?

A bank deposit is liquid – here if the money is locked in, it can be got back on the death of the holder. It is completely ill liquid and in no circumstance can it be accessed ONLY on death.

What makes it attractive?

Simple to understand, guaranteed by the Government, no hidden charges, simple to operate and I am sure they will be well-settled processes and documents for change of address, nominee, bank account, etc. Tried and tested LIC – annuity has been their business for really long..

What happens on death of the pensioner?

The nominee gets the principal amount back. I guess if a 60 year old puts in Rs. 500,000 now and dies at the age of 100 – the money will be just sufficient for the funeral. Hopefully LIC will settle the claim before the funeral.

For whom would I recommend it? 

Those who know that shifting from fund A to fund B and play such games is a challenge should invest in this. Those who have about Rs. 5 crores of retirement corpus should put Rs. 5L in this scheme. Once you are say 65 years of age you should buy such a product and save a lot of hassles. If you buy a product like this when you are 60 make sure that you ask for an annual payment and invest that money into say an ELSS – or as a SIP into an ELSS.

If you have very little money  STAY AWAY: 

The lockin of the principal amount is a big deterrent if you have limited money. If for example you have Rs. 25L for your retirement, you should put say Rs. 50k in this product.

Will there be more such issues in the future: 

Surely, LIC will come out with such plans like this in the future, so do not believe your agent saying ‘If you do not money now you will miss the bus’ – that is bull.

Mostly people who are OVERCONFIDENT of understanding debt markets – long term interest trends in particular need not put it into such a scheme.

For all my friends (who have Rs. 5 crores for retirement alone) I would happily buy such a product every YEAR…so that starting at age 65 (or 70) they could build up an ANNUITY of assured return.

Of course for myself I prefer equities and will not get into an annuity…till I am 65…but from 65 years to 70 years I would like to  buy one every year…time willing..