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Personal Finance

FDs or government bonds better than "Insurance" plans

A twitter discussion led Ganesh Babu into writing about how insurers take you for a ride. An ad at www.simpleinsurance.in from ICICI shows you how, if you invest Rs. 2,000 per month for 20 years, you could get a pension of Rs. 15,315 per month after 30 years (at 10% annualized return).

But let’s have a closer look. Let us put the Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this the Rs.15,315 per month ICICI’s Retirement Plan. The FD comprehensively beats the returns of ICICI by a massive Rs.4,260 per month (21.8% more). And don’t forget that the FD return is more or less guaranteed where as ICICI’s 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation

If you went with ICICI – you would pay 2,000 a month, maybe get your 10% return, and in return get a pension of Rs. 15,315 per month. After you die, they give the money to your spouse. And from first takes it seems after your spouse dies, the corpus is involuntarily donated to ICICI. (Want the money back? Er, we’ll pay you around 1.5K less per month, ok?)

If you consider the same 10% return, then the amount you make, annually compounded after 30 years, is Rs. 39.47 lakhs. (Ganesh has wisely taken a more sane fixed return of 8%, but I’m illustrating how much you’re being robbed). That, invested in an FD or govt. bond at 8% yield, gives you an income of Rs. 26,319 a month. Glee. 40% more than the “insurance” option. Not just that, your family gets to see the entire money should you die.

And there’s the flexibility – need some extra money for hospitalization, to start a business or anything of that sort? With ICICI’s annuity, you have no options to withdraw a big lumpsum. In option 2 – where you manage your own money – you can do what you want.

ICICI’s retirement plan – and to be fair, every single insurer’s retirement plan – is a waste of time. Simply buy long term FDs, long term government bonds or growth gilt funds; the return is far superior. If you want tax savings, get into a term plan and buy an ELSS mutual fund; anyway they will not last much longer (the tax saving nature of them).

Ganesh’s post is eye opening and I will do a post on the crappy annuity plans we have, on another day. That alone is enough to never ever recommend the New Pension Scheme to anyone I know; because it’s your money they don’t allow you to touch.

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  • Anonymous says:

    >Interesting Article…

    Nikhil Shah

  • Anonymous says:

    >If you account for tax, the yearly rate will be less than 8%. So, the compounded amount will be much less.

  • Deepak Shenoy says:

    >Agreed, if you buy FDs. Also government bonds directly, I guess. The taxation structure in your hands (of interest that is supposed to be reinvested) is a bummer.

    But here's the deal: if you got 10% return on your money, and you paid full 30% tax every year, you will STILL end up with enough capital to give you 16K a month!

    You can get more than 10% yield with company debentures like Tata Capital or L&T NCDs (traded on the exchange)

    Also if you buy a long term gilt fund (growth plan) there is no tax (Until withdrawal which will be the same with insurance). Or PPF. Or even a long term floating rate fund!

  • Anonymous says:

    >- Yes it is like you giving money to bank for 20 years, but they dont even allow you to touch even for emergency. Then they give peanut interest of about 5-6%. Person cant touch money for his entire life.

    – One more thing is Annuity value reduces its buying power over time because of inflation. (Annuity remains constant)
    After 5-10 years retired guy will see that his buying power with annuity is pathetic

    – I thought after death money goes to nominee , didnt know about involuntary donation to bank. If yes , then it is big robbery of 30L by these coat-suit-boot-tie-MBA type guys with a smile, finding no word for it . Please confirm this part in your next annuity related article ie if corpus goes to nominee or not.

    – I have been discouraging people in my company newsgroup on pension plans with same views.
    (Henceforth I can post the links to these articles whenever somebody asks about it)

  • CA says:

    >Retirement plans are fine but the annuity rates of insurance companies are so pathetic that I do not recommend anyone to invest in retirement plan, since you will have to utilize ( atleast two-thirds )it to buy an annuity.

    It is not how much you save during accumulation but the annuity rates on offer at the time of your retirement which will determine your monthly pension.

    NPS will also fail for the same reason, unless the annuity rates are corrected. The present govt employees will be in for a great shock at the time of their retirement when they find out that their accumulated money in NPS gets them only peanuts in pension.

  • ashley alfred says:

    >Government blogs are one way that nations can finance their debts, by obtaining loans directly from the public. Government bonds also provide benefits for investors, such as guaranteed returns and, in some cases, tax exemptions. Although many countries offer government bonds. Ashley Alfred – Hinduja Group.

  • Prerna Juneja says:

    >I have taken this plan 15000 submited 1200, every month from next year what to do now

  • Manoj says:

    >Assuming 8% interest for next 30 years is a big blunder. What is the guarentee that the interest rate doesn't go below 5%.

  • G_talk says:

    >WOW.. mate.. u rock.. u r an eye opener.. where were u some years ago?

  • Anonymous says:

    >what about gold or bullion as an investment for future generations

  • Anonymous says:

    >great job guys.

  • Ammu says:

    Hi Deepak,
    If I invest 25000 per year in 5-year tax saving FD and if I continue this for 10 years, what will be the total money I get after 15 years?

  • A. Sarkar says:

    Sir, my monthly net income is Rs.15500/-. I want to invest Rs.1500 – 2000/- per month for 10 years. What is the best plan that will give me high & secured return at the end of the 10th year? And if necessary if I withdraw my money in the mean time, what would be the loss?
    Looking for your advice.
    Thank You.