Sunday, May 29, 2011

Liquidity, safety must for senior citizens

Liquidity, safety must for senior citizens
Sadique Neelgund / May 29, 2011, 0:47 IST
Fixed deposits may be better than senior citizen saving schemes in the
current scenario.

Retirees receive a considerable amount from provident fund
accumulation and superannuation and gratuity benefits. Many prudent
ones would have accumulated a corpus through disciplined investing as

They must make many investment decisions to channelise the retirement
corpus thus accumulated. The first decision will be to determine the
asset allocation mainly between equity and debt. A 70:30, debt:equity
ratio suits many but a proper analysis current investments and passive
income streams must be done first. Debt gives stability to the
portfolio and can be used to generate regular income streams to meet
monthly expenses. Whereas, equity gives long-term returns and helps
beat inflation.

(Following table has not been formatted properly as I chose to have text only)
Please original story in BUsiness Standard.

Feature Fixed Deposits
(Senior Citizens) Senior Citizens
Savings Scheme
Qualifying Age 60 60 (55 for VRS or retired)
Term Differs 5 yrs (extendable by 3 yrs)
Returns 9 - 10% 9%
Prematurity Approximately Penalty of 1.5% bet 1-2 yrs;
withdrawal 1% penalty 1% above 2 yrs
Taxation Interest added to
income and taxed as
per slab applicable Interest added to income and
taxed as per slab;
investment qualifies for
Section 80C benefit"
Fixed deposits (FDs), Senior Citizens Savings Scheme (SCSS) , Post
Office Monthly Income Scheme, debt mutual funds and pension plans by
life insurance companies are the various options available on the debt
side. Of these, FDs and SCSS are your best bets in the current

The SCSS has been a huge hit since its launch in 2004, due to its
attractive interest rate of nine per cent and sovereign backing. FDs,
on the other hand, have been considered unattractive as their post-tax
returns didn't even beat inflation. However in recent times FD rates
have gone up considerably and can be considered as an alternative to
SCSS. Most banks are offering FD rates for senior citizens between 9
-10 per cent. Before making a choice, retirees must consider the
following factors.

Comparing the interest rates is probably the first step but not really
a deciding factor. FDs are offering 0.5 - 1 per cent higher rates than
SCSS, which essentially converts into a higher monthly income for you.
A sum of Rs 15 lakh parked in SCSS will fetch you a monthly income
(payout is actually quarterly) of Rs 11,250, whereas an FD with 9.5
per cent will give you Rs 11,875.

This can be a big deciding factor. SCSS carries a term of five years
and can be extendable by another three years, with interest rates
prevailing at that time. Any premature withdrawal will attract a
penalty of 1.5 per cent between one and two years and one per cent
above two years. Whereas, FDs offer the flexibility of deciding the
term in line with your convenience. Banks also give loans on FDs for
emergency purposes.

SCSS offers regular payout of interest rates on a quarterly basis. FDs
offer regular interest payouts as well as the cumulative option. If
you have a decent regular income stream (say house rentals or pension)
you may not require additional regular income from investments in the
years immediately following your retirement. In this case, opt for the
cumulative option of FDs to grow the investment corpus. The
compounding works well even with debt investments.

The returns from both instruments are taxable and get added to your
income while calculating the tax. However, investments in SCSS are
eligible for Section 80C benefits, where regular senior citizen FDs
don't qualify (except tax-saver term deposits, typically with a
five-year-plus tenure). So, if you fall in the taxable bracket and
wish to avail of this tax benefit, SCSS works better. However, ensure
you aren't already investing in other tax-saving instruments like life
insurance or Public Provident Fund.

In conclusion: it makes sense to invest your retirement corpus in FDs
to build your debt portfolio in this scenario. Make use of the
prevailing high interest rate environment while it lasts, but only
after evaluating all the factors.

The writer is a certified financial planner
Dr P Vyasamoorthy, 30 Gruhalakshmi Colony Secunderabad 500015 Ph
040-27846631 / 9490804278.My blog:

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