If you’re an investor looking for predictable fixed income for the very long term, until recently you had to make do with poor choices. You could invest in 5 or 10-year bank fixed deposits and hope that rates wouldn’t fall sharply when the deposits matured. Or you could pay a lumpsum to an insurer, with added GST, to buy an annuity plan that offered a return of just 5-7 per cent — depending on the product.

But retail investors seeking long-term pension now have a third option that is better in many respects. Central government securities (G-Secs) that mature 20, 30, 40 or 50 years hence, are a great choice for them, because the repayments are guaranteed by the sovereign and the entity paying your pension (the government) will outlive you.

Why now

There are three reasons why G-Secs offer a particularly good deal today for pension-seeking investors. One, buying G-Secs in primary auctions has become quite easy for retail investors after the launch of RBI’s Retail Direct Gilt platform. Once you open an account, you get weekly email notifications of upcoming G-Sec auctions, with details such as the maturity date and indicative yield. You can bid at cutoff yield (decided by RBI) and allotment is assured, unless RBI decides to cancel the auction (this is rare). You can invest a minimum of ₹10,000 in each auction and a maximum of ₹2 crore.

Two, the Indian government recently decided to issue more long-dated G-Secs with maturities of 30, 40 and 50 years, which can be accessed through the RBI retail platform. In fact, insurers who offer annuity products buy and hold the very same long dated G-Secs while promising you a pension.

Three, this is a good time to lock into long-dated debt. Long-term G-Sec yields are at an attractive 7.4-7.5 per cent now, having risen over 150 basis points from sub-6 per cent during Covid. Recent RBI auctions offered 15-year G-Secs at an indicative yield of 7.39 per cent, 30-year ones at 7.48 per cent, 40-year at 7.52 per cent and 50-year at 7.49 per cent.

When you buy long-dated G-Secs, you expose yourself to interest rate risk. If market interest rates rise after you buy them, the market price of your bonds can fall below face value. But this is only an opportunity loss. If you hold the G-Secs to maturity, you will get back your principal as promised. If interest rates in India decline over time, long-dated G-Secs can also see price appreciation in secondary markets. The RBI RDG platform allows nomination of beneficiaries to receive interest and principal repayments in case of the investor’s death.

G-Secs versus annuity plans

How do G-Secs compare to the long-term pension plans (called annuity plans) from insurers? Let’s consider immediate annuity plans. These are plans where you pay a lumpsum purchase price to the insurer, to get a fixed pension starting the very next year, for the rest of your life.

Currently, for a 60-year-old, immediate annuity plans offer a lifelong pension of ₹64,000-66,000 annually for a ₹10 lakh purchase price. If you live until 90, the return (IRR) works out to about 7 per cent. This is assuming the return of purchase price to your nominee.

But investing the same ₹10 lakh in a 30-year G-Sec on the RBI platform, based on current yields, will fetch you ₹74,100 in annual income, with return of principal at maturity. Therefore, if you consider returns alone, the G-Sec scores hands down over the immediate annuity plan.

In some respects, however, G-Secs can be less flexible than immediate annuity plans. Long-dated G-Secs are not available on tap and are occasionally auctioned. You will need to wait for an auction of the desired tenor by RBI and bid for it.

Immediate annuity plans allow you to surrender your policy before maturity, on certain conditions. This is at a haircut, but you do get liquidity. With G-Secs, exit at the time of your choice may not be possible given low secondary market liquidity.

In case of early death of the investor after buying an immediate annuity plan, nominees get immediate return of the purchase price and the pension is stopped. In the case of G-Secs, principal can be claimed by nominees only at maturity while interest payments continue. You need to pay added GST on the purchase price of an annuity plan, while there is no GST on G-Sec purchases. Taxation of interest on both annuity plans and G-Secs is identical.

Insurers also offer deferred annuity plans for investors who seek to set up a fixed income after waiting for a certain number of years. You pay a purchase price in the form of a lumpsum or premiums for a few years. The insurer assures you lifelong income after a deferment period. The longer the deferment period you opt for, the higher the income you get (this is because the insurer gets to hang on to your premium and earn returns on it).

For a ₹10 lakh investment, LIC’s Jeevan Shanti offers you pension of about ₹92,600 a year after a 5-year deferment and ₹1,27,200 a year after 10-year deferment. The IRR works out to 6 and 7 per cent respectively, after factoring in return of purchase price to nominees.

You can earn a better return with long-dated G-Secs offering current yields of 7.4-7.5 per cent. For instance, if you are 50 and invest ₹10 lakh in a 50-year G-Sec, you will immediately begin to receive ₹74,900 a year as interest. To defer your income to 60 and after, you can choose not to spend this interest and re-invest it in fixed deposits every year. If you manage to do this for 10 years at 6 per cent interest, you will have ₹9.12 lakh as accumulated interest by 60. Investing this sum at 6 per cent can fetch you ₹54,720 a year which, along with your ₹74,900 G-Sec interest, will add up to more income than the deferred annuity plan.

But there are two challenges to this theoretical calculation. You may not be disciplined enough to reinvest your interest every year. More important, interest rates can tumble to sub-6 per cent levels at any time over the next 50 years, leading to lower income for you in future. Buying a deferred annuity plan when rates are high shields you from both eventualities, but requires you to sacrifice on returns.

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