Many senior citizens are often victims of relationship managers seeking to push unsuitable financial products down their throat in lieu of higher commissions. Instead of the host of insurance products that serve little purpose for senior citizens, here is a deposit-like annuity product that would suit the elderly.

State Bank of India (SBI) is offering an annuity deposit scheme for both regular and senior citizens; it is, however, more suitable for the latter group.

There are multiple tenors available under this deposit scheme and the payouts are made on a monthly basis.

Here’s why the SBI annuity deposit scheme could be an attractive investment for those seeking steady income after retirement.

What’s the scheme about?

Coming from India’s largest public sector bank, the annuity deposit scheme works a bit like a loan EMI – only the roles of the lender and depositor are reversed here.

So, you deposit a lump-sum with the bank upfront. The bank, in turn, pays you a fixed sum every month. The difference between a regular deposit that pays monthly interest and the annuity deposit scheme is simple. A regular deposit pays only the interest periodically and returns the principal after the tenor is completed.

The annuity deposit, on the other hand, clubs both the principal and interest components and pays them an amount every month – much like how you pay an EMI on a loan.

Now, there are four tenors available – 36, 48, 84 and 120 months.

The interest rate applicable is the equivalent rate for the same tenor of term deposits of the bank. Since annuity-like products are more suitable for the retired, and as interest rates are better for senior citizens, this scheme is mostly for the elderly seeking safe and reasonable income.

For the general public, the rates on SBI’s term deposits aren’t that attractive and there may be better deposit options to explore.

Also, given that there is a 10-year tenor available with the rates that can be locked into, senior citizens would find the scheme suitable. The rate on the 10-year tenor is 7.5 per cent currently for those aged 60 and above.

There is no maximum limit on how much you could invest.

How the deposit works

Here’s an example of how the scheme would work. Let’s say you invest ₹25 lakh in the annuity deposit scheme for a 10-year tenor. As mentioned earlier, the interest rate is 7.5 per cent for senior citizens.

You will receive a monthly payment of ₹29,675 for 10 years. This amount consists of principal and interest amounts.

If the yield on an XIRR basis is calculated on the above payouts, the figure comes to around 7.76 per cent.

Premature withdrawals are allowed for deposits of ₹15 lakh and above. In case of death, premature withdrawal is allowed without limits.

Compares favourably with other fixed income options

There are many large banks and NBFCs that do offer higher interest rates. But these are for shorter tenors, typically for 24-48 months. Banks do offer 10-year deposits, but none offers an annuity-like structure that return both principal and interest together every month.

Though 7.5 per cent interest and a 7.76 per cent yield may not seem spectacular in a high interest rate environment, the annuity deposit scheme still compares favourably with other options available for senior citizens.

For example, the 10-year g-sec trades at an yield of 7.07 per cent. The best of immediate annuity products offer yield of around 7-7.3 per cent. Even the Post office monthly income scheme, which comes with an investment limit, offers an interest of 7.4 per cent.

Of course, the Senior Citizens’ Savings Scheme (SCSS) and RBI Floating Rate Bonds currently offer more than 8 per cent. However, SCSS comes with a 5-year tenor and a maximum limit of s ₹30 lakh.

The RBI Floating Rate Bonds have their rates reset periodically based on the prevailing interest on the NSC and are thus variable.

What must investors do?

The SBI annuity deposit scheme is an attractive product for senior citizens. Such depositors can consider the 10-year tenor and lock into the better rates prevalent currently.

This scheme can be a key portion of their debt portfolio to generate a regular income — say, around 25 per cent.

Top bank and highly rated NBFC deposits, SCSS, select debt funds and RBI Floating Rate Bonds are other options. An immediate annuity product with good yields could also be another avenue.

All interest in the SBI annuity deposit scheme is taxable. Senior citizens can claim up to ₹50,000 in deduction from all savings bank and deposit interest under section 80 TTB.

Related Topics