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 guaranteed pension scheme and is different from the National Pension System (NPS) and the pension plans offered by life insurance companies. This would mean that irrespective of the returns generated by APY, a subscriber will continue to get for life the pension she had opted for while enrolling in the scheme. Further, once the subscriber dies, an equal amount of pension will be given to the spouse till he/she will be alive, and corpus will be returned to the nominees after that.
However, with time the value of Rupee decreases due to inflation. This makes everything costly due to which you have to spend higher amount to purchase same items after a time gap. So, the value of Rs 5000 after 30 years will not be same as today. Now, if you want to know the current/today’s value of Rs 5,000 pension that will be received from age 60, we will have to make some assumptions first.
Suppose, an individual aged 30 years continues to pay Rs 577 per month (annually Rs 6,924) for 30 years. Once the subscriber turns 60 years, she will be entitled to a pension of Rs 5,000 per month (annually Rs 60,000). The life expectancy is assumed to be 90 years. Thus, she will receive the pension for 30 years. The inflation rate is assumed to be 7%.
Now, one needs to calculate the present/today’s value of the pension amount. In other words, for a subscriber who is 30 years old now, what will be today’s value of the pension amount of Rs 5,000? The formula to calculate the present value is as follows:
A = Y/[ (1+i)^(n)]
Where A is the present/today’s value of Rs 5,000 initial pension at the age of 60 years of an individual of current age 30 years
i is the inflation rate
n is the number of years
And Y is Rs 5,000 pension which starts at the age of 60 years of an individual
The answer is Rs 656.83. What this means is that Rs 5,000 after 30 years, i.e., at the age of 60 years, will be the equivalent to today’s Rs 656.83.
It is important to note that as inflation increases, the purchasing power of Rs 5,000 will keep on decreasing. The Rs 5,000 the subscriber will get at the age of 61 (after 31 years) will be Rs 613.86 in today’s value. Hence, as the retirement years increase, the purchasing power of Rs 5,000 in the retirement year will keep on decreasing.
Why you should still invest in APY
From the table above, one can see that as the retirement years progress, 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 scheme, there are certain reasons that you should consider.
If you are closer to 40 years – The maximum age for investing in APY is 40 years. This would mean that you can invest in the scheme till the age of 40 years and 364 days. Thus, if you are close to this age, you will have to invest for a minimum of 19 years. For example, an individual starting to invest at the age of 40 would have to make an APY investment for 20 years. The monthly contribution amount for a pension of Rs 5,000 will be Rs 1,454. As the investment period is smaller, the present value of Rs 5,000 – or the value today of the Rs 5,000 pension that the subscriber will receive on retirement – will be higher than what is shown in the table above.
Today’s value of Rs 5,000 for those who start investing at the age of 40(investment period of 20 years) will be Rs 1,292.09 On the other hand, if a 30-year-old individual starts investing now, then today’s value of Rs 5,000 will be Rs 656.83.
Today’s value of Rs 5,000 almost doubles for the 40-year-old due to a reduction of 10 years in the investing period.
Stable income – It is important to note that there is no other guaranteed pension plan. Other plans that are available are the NPS and the pension plans offered by life insurance companies. However, these are not guaranteed pension plans. The pension amount that you will be eligible for in NPS and the pension plans depends on certain factors. These include:
a) Amount of corpus accumulated under the pension scheme
b) The annuity rate offered by the life insurance companies
c) Type of annuity option chosen. Example – Increasing annuity, uniform annuity, etc
d) Duration of annuity offered
However, it should be noted that APY pension should not be the only source of income during retirement. There should be other income sources too as the APY pension amount is small. Some of the examples of other sources of income are systematic withdrawal plans from mutual funds and interest incomes from senior citizen savings schemes.
If your spouse is eligible for APY, then you can consider investing in your spouse’s name as well. This will double the amount of pension from the age of 60 of younger spouse.
Who can join the APY scheme?
An individual aged between 18 and 40 years of age can join the scheme. The contribution will depend on the age of the subscriber at the time of joining the scheme. For instance, a subscriber at the age of 18 years opting for a monthly pension of Rs 5,000 will pay a monthly contribution of Rs 210 for 42 years. Similarly, a subscriber at the age of 24 opting for a monthly pension of Rs 5,000 will pay a monthly contribution of Rs 346 for 36 years.