Should I Invest in Atal Pension Yojana, the pension scheme for the common man?

2015-06-17 » finance, investment options, retirement planning

The Atal Pension Yojana was started by the Indian government for Indian citizens in general and Indian citizens in the unorganized sector in particular. I have developed some rudimentary finance skills from a few coursera courses and I decided to apply them to see what additional value they provide over a basic Recurring Deposit available in a bank.

Features of this scheme

  • The interest rate is fixed for the rest of the period. This may change(both positive/negative) if you invest in a bank.
  • The yojana scheme does not talk about what happens if you stop paying midway. In case of bank the corpus can be got back and might loose interest for a years period max.
  • The max pension you can get is 5k. If you discount for inflation at 5.01% (as per Trading Economics ) then the for a pension of Rs.5000 in 25 years, the equivalent current is Rs.1473. If you consider the peak inflation rate of 11.16 that we faced in Nov 13, it will be a mere Rs.355. Hoping the inflation never reaches that high again, the value is going to be somewhere in the middle.
  • Capital tax will be applied if the investment is less than 5 years in a bank which you will not have in APY.
  • For eligible people there is a govt contribution of 50% (or Rs.1000 whichever is least) for the first 5 years(which I am not considering in this calculation)

Some Context for the following calculation

  • I am ignoring the co-contribution from the government as I may not come under the bracket of those who don’t pay income tax.
  • View this pdf for the complete features of Atal Pension Yojana Scheme.
  • I am particularly interested in those above 30 years (for my hubby ;) ) . Since the premium schemes are given for each 5 year slab, let us look at the premium scheme for those who are 35 years old.
  • What ever the age you are you will end up paying till you are 60 years old. So a 18 year old will pay for 42 years and a 40 year old will pay for 20 years.
  • A 35 year old should pay Rs.902 for 25 years.

The Calculation

Atal Pension Yojana for a 35 year old

Monthly payment = Rs. 902

years of payment = 25

Investment details

Interest rate = 8% This is the rate of interest provided by national banks for recurring deposit

Interest rate can be calulated compounding every 1, 4, 6, 12 months based on how and where you invest.

Corpus which gets created after 25 years for the above periodicity is Rs791,298.69, Rs826,234.26, Rs844,900.62, Rs857,825.81 respectively. This is calculated using the Future Value formula built in the spreadsheet.

The monthly pension you would get would be the simple interest calculated on the above corpuses calculated monthly which amounts to Rs5,275.32, Rs5,508.23, Rs5,632.67, Rs5,718.84 respectively. The interest rate used is again 8% which is the same as interest rate provided for RDs.

As you can see, the monthly pension of Rs.5000 provided my the scheme is a little less than the interest that our corpus will generate assuming an interest rate equal to today’s Recurring Deposits. Unfortunately, the maximum term possible for an RD is 10 years. Though it is possible to renew the RD after that, you may not be assured the same rate of interest.

ABCDE
1
Atal Pension Yojana
2
Number of years25
3
Periodicity
Monthly = 12
Yearly = 1
Quarterly = 4
Half-yearly -2
12421
4
Monthly payment-902
5
Interest rate ( Based on rates
promised by national banks on fd)
0.085
6
Value of Corpus on Maturity
Rs930,916.60Rs915,398.29Rs893,062.56Rs851,500.19
7
Interest payment possible
at the same interest rate above (simple interest monthly)
Rs6,593.99Rs6,484.07Rs6,325.86Rs6,031.46

ABCDE
1
Atal Pension Yojana
2
Number of years25
3
Periodicity
Monthly = 12
Yearly = 1
Quarterly = 4
Half-yearly -2
12421
4
Monthly payment-902
5
Interest rate ( Based on rates
promised by national banks on fd)
0.08
6
Value of Corpus on Maturity
Rs857,825.81Rs844,900.62Rs826,234.26Rs791,298.69
7
Interest payment possible
at the same interest rate above (simple interest monthly)
Rs5,718.84Rs5,632.67Rs5,508.23Rs5,275.32

The interest can be little higher if you can find any debentures, govt bond, dept fund, etc which will provide almost assured interest of 10% or more If you are willing to take a little more risk and invest the same in mutual fund/equity then you can expect 12% to 15%. However the risk involved defeats the purpose of retirement planning. However some amount of risky investment should also account for some percentage of the retirement planning portfolio.

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