How Senior Citizens Can Save And Beat Risk Amid Record Low Rates
An old man looks up at an electronic screen displaying stock figures at the Bombay Stock Exchange (BSE) in Mumbai, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

How Senior Citizens Can Save And Beat Risk Amid Record Low Rates

Senior citizens, most of whom depend on interest earned from bank deposits, face historically low interest rates. As a result, any fresh investments will earn them less that what they did in the past.

The national lockdown—imposed to curb the spread of the novel coronavirus—and the resultant jolt to the economy has forced the Reserve Bank of India to slash policy interest rates to the lowest since the introduction of its liquidity adjustment facility at the turn of the century.

The policy repo rate, which had already been cut by 135 basis points in 2019, was reduced by a further 115 basis points this year to 4%. Banks have already cut the interest rates they offer on deposits, though a few large lenders have introduced special schemes for senior citizens.

State Bank of India, ICICI Bank Ltd. and HDFC Bank Ltd. have launched similar offers for senior citizens looking to deposit money for between five and 10 years. The offers are valid till Sept. 30 this year. While ICICI Bank is offering 6.55% on such deposits, SBI and HDFC Bank are offering 6.5%. The rates are as much as 110 basis points higher than those offered to other depositors.

“With the prospect of subdued economic growth, it’s likely that interest rates will remain soft for the next couple of years at least,” said Arvind Rao, certified financial planner and founder Arvind Rao & Associates. “In fact, there is even the possibility of rates falling further.”

While the special rates on offer by the larger banks are an option, there are a few alternatives that should be considered—which are specifically for senior citizens, bearing in mind their lower risk-taking capability.

Senior Citizen Savings Scheme

This government-sponsored savings scheme was launched in 2004, and is available to those older than 60 years of age and those between 55 and 60 years who have opted for a voluntary retirement scheme.

The scheme currently offers an interest rate of 7.4% on five-year deposits. Investments made in this scheme are eligible for tax deduction under the old income tax regime, but returns are taxable as per the slab rate. Additionally, if the annual interest earned is above Rs 50,000, there is a tax deducted at source.

Finally, depositors have the option of extending the deposit once—by three years, the request for which has to be submitted within one year from maturity.

Pradhan Mantri Vaya Vandana Yojana

This is a pension scheme run by the Life Insurance Corporation of India, and was initially only offered till March 31. The government, however, recently approved its extension till March 31, 2023.

Under the scheme, a senior citizen can make a lumpsum investment of up to Rs 15 lakh and receive a guaranteed annualised rate of return of 7.4%, which is payable monthly, quarterly, semi-annually or annually. At the end of 10 years, the principal is returned. The lumpsum is also payable to a nominee if the pensioner dies before the completion of the term.

Post Office Monthly Income Scheme

A maximum of Rs 4.5 lakh can be deposited by any individual in this scheme for a period of five years. The interest on the deposit is payable on a monthly basis and the principle is returned at the end of the term.

The current interest rate offered under this scheme is 6.6%, which is only marginally higher than the rate offered by large banks on senior citizen fixed deposits.

The Advisor’s Take

The foremost concern for most senior citizens isn’t returns but safety of the capital invested, Rao said. Though mutual fund fixed income investments can potentially give higher returns, it might be a better idea to opt for more secure investment options like bank deposits and government-sponsored schemes, he said.

There is no thumb rule that can be followed by senior citizens with respect to the amount kept aside for emergencies. Generally, cost of healthcare is higher for people above the age of 60, and with health insurance policies sometimes prohibitively expensive, such individuals have to pay for these expenses out of pocket.

From the point of view of the current crisis, it’s probably a good idea for senior citizens to keep aside multiple layers of contingencies, Rao said. “First and foremost, for emergencies there should be some cash kept at hand. Further, a bank balance of Rs 1-1.5 lakh is ideal.”

Apart from this, based on each person’s assessment of the requirement for an emergency corpus, a dedicated fixed deposit can be made, Rao said. This can be a sweep-in facility offered by banks, which allows for some flexibility in terms of access to funds.

Finally, when it comes to fixed income investments, Rao believes it is a good idea for senior citizens to opt for fixed deposits because of the relative ease of operating these instruments. He also advises that investments should be locked in for longer periods of time.

“If we talk about the next six to 10 years, we’re likely staring at a declining interest rate scenario. Even if we look at the past five years, deposits have been available for as high as 8.5%. Based on the current scenario, we don’t know when we’ll see those rates again. Someone who had invested in a 10-year deposit at 8.5% would be quite happy today.”

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