For people currently in their 20s or 30s, a monthly pension of Rs 5,000 at the age of 60 may seem small. But APY is a guarantee pension scheme and is different from the National Pension System (NPS) and pension plans offered by life insurance companies. This would mean that irrespective of the return generated by the APY, a subscriber would continue to receive the pension for the rest of his life which he had opted for while enrolling in the scheme. Further, once the subscriber dies, his/her spouse will be given an equal amount of pension till he/she is alive, and thereafter the corpus will be returned to the nominee.
However, with time value of Rs. decreases due to inflation. This makes everything expensive due to which you have to spend more amount to buy similar items after a time lag. So, the value of Rs 5000 after 30 years will not be the same as it is today. Now, if you want to know the present/today value of Rs.5,000 pension to be received from the age of 60 years, we have to make some assumptions first.
Suppose, a person of 30 years of age continues to pay Rs 577 per month (Rs 6,924 per annum) for 30 years. Once the subscriber turns 60, she will be entitled to a pension of Rs 5,000 per month (Rs 60,000 annually). Life expectancy is considered to be 90 years. Thus, he will get pension for 30 years. The rate of inflation is assumed to be 7%.
Now, one needs to calculate the present/today value of the pension amount. In other words, for a subscriber who is just 30 years old, what will be the value of Rs 5,000 pension amount today? The formula to calculate present value is as follows:
A = Y /[ (1+i)^(n)]
Where A is the current/today’s value initial pension of Rs 5,000 at the age of 60 years of a person of 30 years of present age.
i is the inflation rate
n is the number of years
and Y is the pension of Rs 5,000 which starts from the age of 60 years of a person
The answer is Rs 656.83. This means that after 30 years, Rs 5,000, that is, at the age of 60, will be equal to Rs 656.83 today.
It is important to note that as inflation rises, the purchasing power of Rs 5,000 will continue to decline. The Rs 5,000 that the subscriber will get at the age of 61 (after 31 years) will be Rs 613.86 in today’s price. Therefore, as the retirement years increase, the purchasing power of Rs 5,000 in the retirement year will continue to decrease.
why do you still need Invest in APY
It can be seen from the above table that with the progression of retirement years, the purchasing power of the pension amount of Rs.5,000 keeps on decreasing. However, before you decide that it is not worth investing in this plan, there are certain reasons that you should consider.
If you are close to 40 years – The maximum age to invest in APY is 40 years. This would mean that you can invest in this scheme till the age of 40 years and 364 days. Thus, if you are close to this age, you need to invest for at least 19 years. For example, a person who starts investing at the age of 40 has to invest APY for 20 years. For a pension of Rs 5,000, the monthly contribution amount would be Rs 1,454. Since the investment period is short, the present value of Rs 5,000 – or the value of Rs 5,000 pension that the subscriber will receive upon retirement – will be higher than the value shown in the table above.
Today’s value of Rs 5,000 will be Rs 1,292.09 for those who start investing at the age of 40 years (investment tenure of 20 years), while today’s value will be Rs 5,000 if a 30-year-old starts investing now. 656.83 is Rs.
Today’s value of Rs 5,000 almost doubles for a 40-year-old man due to a reduction of 10 years in the investment period.
stable income – It is important to note that there is no other guaranteed pension plan. Other plans that are available are NPS and pension plans offered by life insurance companies. However, these are not guaranteed pension plans. The pension amount you will be eligible for in NPS and pension plans depends on a few factors. This includes:
a) the amount of money accumulated under the pension scheme
b) Annuity rate offered by life insurance companies
c) The type of annuity option chosen. Example – increasing annuity, flat annuity, etc.
d) Term of annuity offering
However, it should be noted that APY pension should not be the only source of income during retirement. There should be other sources of income as the amount of APY pension is less. Some examples of other sources of income are systematic withdrawal plans from mutual funds and interest income from senior citizen savings schemes.
If your spouse is eligible for APY, you can consider investing in your spouse’s name as well. This will double the amount of pension from the age of 60 years of the younger spouse.
Who can join the APY scheme?
A person in the age group of 18 to 40 years can join this scheme. The contribution will depend on the age of the subscriber at the time of joining the scheme. For example, a subscriber opting for a monthly pension of Rs 5,000 at the age of 18 years will have to make a monthly contribution of Rs 210 for 42 years. Similarly, a subscriber opting for a monthly pension of Rs 5,000 at the age of 24 will have to make a monthly contribution of Rs 346 for 36 years.