India has one of the largest populations of senior citizens. According to official estimates, nearly 10 percent of India's population is over the age of 60. This puts the total population of senior citizens at around 140 million currently. Just a decade ago, senior citizens accounted for 8.6 per cent of the country’s total population.
The number of ageing citizens is growing at a faster pace than the overall population growth. At this pace, the population of senior citizens is projected to more than double to 250 million over the next fifteen years. This has serious implications for the country's public finances and pension policy. The steady aging of India’s population and rising life expectancy is however also a financial issue for individuals and families.
A typical senior citizen now lives for nearly 15 years post-retirement age. However, unlike the developed countries, the majority of elderly people in India are not covered under any formal retirement income scheme.
Formal retirement income in India is restricted to people retiring from government jobs and select government-owned enterprises such as railways. They are a minority and the majority of adults and workers in India have plans for their own post-retirement income.
And even if you have planned for a post-retirement income and step into old age with a large corpus, it’s important to stay in charge of your finances. This is especially crucial for self-employed individuals or those working in an unorganized sector or in small firms with no pensions or social security. Retirement planning is extremely important to ensure financial security during twilight years.
The most important thing for senior citizens is to focus on preserving their savings and staying away from speculative grade assets such as equity, cryptos, commercial real estate and commodities.
In other words, senior citizens should stay away from assets and investment products that focus on capital appreciation rather than a recurring income.
Their second goal should be to optimise the yield on investment or the recurring cash flow from their investment. This means investment in high-grade fixed-income instruments.
Here are five savings and investment options listed for senior citizens that will provide them with financial freedom in their old age.
1. Senior Citizens’ Savings Scheme (SCSS): This is one of the best savings and investment instruments for the elderly. The scheme is open to any individual above the age of 60 years and offers an interest rate of 8.2 per cent with a maturity of 5 years. An SCS account can be opened in any bank or the nearest post office. The maturity can be extended by additional three years by submitting an application in the required format within one year of the maturity of the account.
An individual can invest a maximum of Rs 30 lakh in SCS in a joint account and interest is paid quarterly.
At the current rate of interest, a lump-sum investment of Rs 10 lakh in the scheme will yield a senior citizen a monthly income of around Rs 7000 or Rs 21,000 every quarter.
The scheme also offers the facility of premature withdrawal in case of an emergency. The interest income from the scheme is however taxable under income tax rules.
2. Post Office Monthly Income Scheme (POMIS): Post Office Monthly Income Scheme (POMIS) is another popular and safe savings cum income scheme for the elderly. The scheme offers an interest rate of 6.6 percent per annum and interest is paid out monthly. This makes it closer to a pension scheme and annuities offered by life insurance companies. An individual can invest up to Rs 4.5 lakh in the scheme with a maturity of five years. The investment limit however doubles to Rs 9 lakh if you open a joint account with other family members.
At the current rate of interest, a lump sum investment of Rs 9 lakh in the scheme for a tenure of five years will yield a senior citizen a monthly income of around Rs 5000.
The scheme doesn’t provide any tax benefits and the interest is directly transferred into the savings account of the account holder.
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3. Bank Fixed Deposits: Bank fixed deposits are another great saving option for senior citizens. The best thing about bank FDs is their flexibility and convenience. Most banks have raised interest on their deposit in the last one year which has once again made bank FDs attractive for retirees and senior citizens. Banks offer all kinds with a tenure starting from a week to up to 7 years with varying interest rates. The highest rate of interest is however most often on FDs with tenure of between 2 and 3 years depending on the banks. So before you decide to invest in a bank FD, study the rate of interest for various tenures and then invest.
4. Corporate Fixed deposits: Many companies and non-bank finance companies offer corporate fixed deposits with a tenure of up to seven years. The interest rate on corporate fixed deposits can be up to 200 basis points higher than bank FDs of similar maturity.
The rate of interest on corporate deposits is inversely proportional to the company’s credit ratings. The lower the company’s credit rating, the higher the interest rate on its FDs.
A lower credit rating however means a greater risk of the company defaulting on its financial obligations. So it is best to invest in companies with a credit rating of AA or higher.
5. National Savings Certificates (NSC): National Savings Certificates are issued by the Post Office and are like fixed deposits offering 7.7 percent returns for a lock-in period of 5 years. The interest in the intervening period is reinvested and the total amount along with the principal is paid out by the end of the five-year maturity. One of the best things about NSC is that the savings made under this scheme are exempted from income tax.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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