Come October 1, 2022, income taxpayers will not remain eligible for the Atal Pension Yojana as the Centre recently announced a change in the scheme. The latest modification mandates that if a subscriber, who joined on or after October 1, 2022, is subsequently found to have been an income-tax payer on or before the date of application, the APY account shall be closed and the accumulated pension wealth till date would be given to the subscriber.
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The government-backed scheme offers a guaranteed pension from the age of 60. The minimum and maximum pension an individual can get is Rs 1,000 per month (Rs 12,000 annually) and Rs 5,000 per month (Rs 60,000 annually), respectively. 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.
While the amount may seem very miniscule to young people, Rs 5,000 can be of great help in old age. An Atal Pension Yojana subscriber will continue to receive a pension irrespective of the returns generated by the scheme. Additionally, 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.
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Value of Rs 5,000 after 30 years
However, if you have made up your mind to subscribe to the scheme, remember that after a time gap, everything gets costly so the value of Rs 5,000 after 30 years will not be the same as today.
Factor this: Suppose an individual aged 30 years continues to pay Rs 577 per month (annually Rs 6,924) for 30 years. Once they turn 60, they become entitled to a pension of Rs 5,000 per month (annually Rs 60,000). The life expectancy is assumed to be 90 years. Thus, the subscriber will receive the pension for 30 years. The inflation rate is assumed to be 7 per cent.
Now, one needs to calculate the present/today’s value of the pension amount. The formula to calculate the present value is: A = Y/[ (1+i)^(n)]
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
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The answer works out to be Rs 656.83, meaning that Rs 5,000 after 30 years will be the equivalent to today’s Rs 656.83. With the rise in inflation, the purchasing power of Rs 5,000 will also keep on decreasing.
While you might assume from the above calculation that this investment would be a waste, it would still be wise to look at a few factors one must consider.
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Investing age
A person who chooses to start investing in APY when they are closer to 40, might get more from the same Rs 5,000 than a person who starts investing in his 30s. 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 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. Those who start investing at the age of 40 (investment period of 20 years) will get a higher value for Rs 5,000 i.e. Rs 1,292.09 vs Rs 656.83 for who start in their 30s.
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Stable income
It is important to note that there is no other guaranteed pension plan. So, APY assures a fixed monthly pension for senior citizens. However, APY pension should not be the only source of income during retirement. You must plan for other income sources as well.
