Relief for senior citizens on reverse mortgage but lots more needs to be done

The collective voices of senior citizen through Moneylife Foundation and many others has finally been heard. The government has announced that reverse mortgage annuity would be tax-free. However, there is lot more that needs to be done, including regulation, to make senior citizens live a dignified life


A sign that India is waking up to the needs of its aging population is the sudden boost to reverse mortgage (RM) products through a change in tax treatment. RM allows senior citizens, who are short of money, to mortgage their property to a bank and get monthly payments in the form of annuities (through an arrangement a bank has with an insurance company). Annuities are taxable but those from RM will be tax-free as per the new thinking. The government has also allowed payments to be made for the lifetime of the borrower by removing the absurd cap of 20 years laid down earlier. It has taken more than three years for the government to accede to requests from industry and NGOs, including Moneylife Foundation, to make annuities tax-free. Why is this so important? Because, in times of galloping inflation and healthcare costs, senior citizens are able to draw down the value of their homes to generate spending money while continuing to live there for their lifetime.

A few months ago, Moneylife collated published data on the net worth of young couples across the country. It showed that over 75%-85% of their wealth is in illiquid real estate, mainly for the roof over their head. We expect the data to be similar for senior citizens. While India has an old-age pension scheme that pays a pittance to destitute seniors, there is no protection for middle-class elders facing a financial crunch. Also, unlike developed countries, the Indian government offers no social security for those who have paid their taxes throughout their working lives; nor does it provide any guarantee or subsidy on RM products. Consequently, India has the first market-based RM product where the mortality and interest risk is borne by two separate entities—a bank and an insurer.
Despite this, ever since it was launched in 2008, reverse mortgage, as a concept, has struggled to become viable and understood by the tax authorities. The initial RM products were structured as loans leading to harassment when tax authorities treated the payments from banks as taxable income. Then the government issued an official clarification, making income from RMs tax-free. The new changes in RM products structured as annuities will hopefully lead to the launch of more attractive RM options.

Of course, some cultural issues remain. Banks that have launched RM products say that children, who cannot provide for parents, still resent their going in for RM, since they see it as an erosion of their legacy. India also has a class of elders who took a home loan rather late in life and are repaying a mortgage after retirement with no new income to support them. Although RM products have failed to take off so far, this market is estimated at upwards of Rs20,000 crore and can see robust growth if banks invest in creating awareness about the product and market it without exploitative or extortionate charges.
After all, there is a growing number of middle-to-affluent-class parents who do not want to depend on their children nor do they need to protect their homes as inheritance.
 

Retirement Homes Spreading

 

But well thought-out regulations required

An unprecedented economic boom since 2003 has created a new set of needs and expectations among economically independent senior citizens. Many of them have children living abroad or in other cities, creating a market for retirement communities where they can live with people of their own age and similar interests. In ideal situations, retirement communities provide secure and serene living without the drudgery of housekeeping, maintenance of infrastructure and cooking, for a price, as well recreation and companionship. As seniors grow older and need skilled nursing and healthcare, there is a big market for assisted living facilities. In most developed countries, these are highly regulated services, with stringent rules and liabilities for failure to deliver the promised care, service or infrastructure.

But while the government slumbers, the market has been quick to recognise the implications of changing demographics and launch products for senior citizens in different economic segments. According to Jones LaSalle, the current demand for senior housing is 300,000 units. Its report says we already have around 30 retirement home projects in Pune, Chennai, Bengaluru, Goa, Coimbatore and other cities. Most of these are priced between Rs25 lakh to Rs1 crore, says the firm. Apart from the deposit/purchase cost, the monthly cost of living (covering food, transport, amenities such as libraries, recreation, healthcare, concierge, etc) is estimated at Rs5,000 to Rs15,000 per couple going to as high as Rs35,000 to Rs45,000 in the luxury category. Some also offer a deposit-model to rent space in a retirement community rather than buy it outright.

Maintaining retirement homes and assisted living facilities requires trained and technical manpower and high level of discipline. The nature of the business indicates the need for strict regulation and enforcement to ensure that service-providers deliver the promised services. While there are extremely well-run retirement homes, there are also rising complaints about bad maintenance, false promises, staff issues, vanishing cooks and, worse, a sense of being trapped in a situation which has no easy exit or re-sale value. Unfortunately, as far as public policy is concerned, the government is still in the last century and the current generation of seniors will be the guinea pigs whose travails and experiences may lead to new legislation, but only if they come together and make their voice heard.
 

Growing Market

 

Elder-care market is growing without any oversight

India will have the second largest population of senior citizens in the world in a few decades from now, but there is little public discussion on planning for an aging population. The Global Age Watch Index ranks India 73rd in senior-care and an article in The Economist shows that we are among the worst countries to die in. The National Policy for Older Persons (NPOP), framed in 1999, has not yet been implemented and it is already outdated. It does not take into account the huge economic surge between 2003 and 2013. How does this affect the Moneylife reader? Well, galloping healthcare costs, an acute shortage of specialised training facilities for geriatric care-givers, especially for homecare, no push to create and regulate assisted living facilities which are becoming crucial in urban areas for elderly persons battling Alzheimer’s, Parkinson’s, strokes or dementia, are just some issues. How important is this? In the US, there are 31,000 highly regulated assisted living facilities that cater to 750,000 people. Yet, even in this regulated environment, ProPublica (a not-for-profit, independent web journal) published a huge exposé on how Emerald Hills, a much touted, fast-growing chain of publicly listed assisted living facilities was cutting corners on staff and care-giving in order to extract higher profits. Imagine the kind of horrors and exploitation that would occur in India if unregulated business were allowed to grab a clearly growing market segment just because the government does not care and there is already an acute shortage of trained manpower.
 

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COMMENTS

Sunil

5 years ago

Very good article . Hopefully the government will take note and put in a good structure to make it easier for senior citizens to be comfortable.

Ravi

5 years ago

Being a senior citizen couple we are rather saddened at the situation in India related to retirement homes meeting with our aspirations. Especially the sentence "While there are extremely well-run retirement homes, there are also rising complaints about bad maintenance, false promises, staff issues, vanishing cooks and, worse, a sense of being trapped in a situation which has no easy exit or re-sale value" makes us wary of jumping into a situation which will quicken our death ! Why not business circles try Retirement management services where the assisted living including food, room service etc could be taken care of in their own homes? Especially now that reverse mortgage opens up some chance for funds in these days of inflation such a move would be welcome. Perhaps Moneylife could work on this?

NPS: Units may be allotted at an NAV of 10 days later!

Unlike mutual funds, where a fund house allots units at the NAV on the same day or next business day, depending on the cut-off time for payments received, contributions to accounts in New Pension System –NPS units allotted, at least, four days and up to 10 days after, for non-cash transactions!

The National Pension System (NPS) is still riddled with issues. One of Moneylife Foundation’s members, Pradeep Kavi, recently drew our attention to a major flaw: for contributions made to an NPS account, the units are not allotted at the NAV of the same day or the next day but could be allotted at the NAV of up to 10 days ahead! Thus investors would lose the benefit of a lower NAV on the day of investment. In case one is investing in the equity fund (asset class E) of the scheme where a maximum of 50% of the contribution is invested, one may lose the advantage of investing when the market has dipped.
 

For example, if a person chose to make a contribution on 28 August 2013 when the Sensex was at 17,996, the NAV of one of the pension fund managers—HDFC Pension Fund Scheme was 9.53 (Tier I - Equity). But if it took seven working days for the payment to be processed, the NAV would have been 6.59% higher at 10.15 while the Sensex moved up 7% to 19,270 as on 6 September 2013. Thus, an investor would have effectively got 6% lower number of units from the equity fund when getting 6% for a whole year has been tough for equity investors.
 

In the offer document of NPS schemes, there is no mention of the applicable NAV for an investment. However, upon digging deeper, in a document from PFRDA‘s ‘Handbook on NPS’, certain timelines are mentioned. For cash contributions, the document mentions that it takes four business days for the payment to reach the pension fund managers, who then invest and declare the NAV at the end of day. For non-cash payments, the number of days increases with the time taken to clear funds. Therefore, considering non-business days in between, for non-cash contributions it could take over from two to 10 days.
 

This would not happen in the case of mutual fund schemes which are similarly managed. It is clearly specified in mutual fund offer documents that for valid applications accepted at an official point of acceptance up to 3.00pm with a local cheque or demand draft payable at par at the place where it is received, the closing NAV of the day of receipt of application is applicable. After 3.00 pm the NAV of the next business day is applicable.
 

The fund investment process in NPS is initiated when the trustee bank receives funds from a point of presence (where the investor makes his payment) and transfers funds to the pension fund managers for investment. While the point of presence (POP) for the NPS deposits the funds to the trustee bank on the next business day, it takes three working days for the bank to upload a fund receipt confirmation to the central record keeping agency (CRA). On the fourth day, the bank remits the fund to the pension fund managers.
 

NPS, which was introduced by the central government on January 2004 for its new entrants and subsequently extended to the private sector on May 2009, has accumulated a corpus of Rs 33,000 crores contributed by 50 lakh subscribers. The government has taken several steps to boost NPS investments. The finance ministry gave additional incentives to all subscribers registered in FY2010-11 who were eligible for getting a contribution of Rs1,000 per year from the government for four years beginning the same year. However, this too, did not draw much interest from new subscribers. One of the main deterrents is that Tier-I of the NPS does not offer a facility to subscribers to withdraw their funds till they reach 60. (Read: New Pension System: Will withdrawal issues be addressed?)
 

NPS has two accounts. In the tier I account one can start investing from the age of 18 years and your money gets locked in till you are 60 years. In Tier II account one has the flexibility to withdraw any time.
 

In each account one can choose from three funds: an equity fund, in which you can put up to 50% of your investment, fixed income instruments other than government securities and government securities. One can also choose their own asset allocation through the active choice option. If not, they can go for the auto choice which is an automatic lifecycle-based investing which maintains a 50% allocation towards equity up to the age of 35 and then gradually reduces the equity allocation to 10% by age 55.
 

The finance ministry argues that NPS could be a good substitute for the employee pension scheme (EPS) of the Employees' Provident Fund Organisation and would be beneficial for subscribers, as they would get decent returns and adequate pension. However, there are still several flaws in the system.

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COMMENTS

D A Bhatt

5 years ago

Over the passage of time NPS has become more and more expensive and costly to private subscribers and controversial for all types of subscribers. All of its drawbacks has been brought to notice of concerned authorities time to time, but it appears that all authorities inclusive of government are interested to fulfill their motives at the cost of subscribers and mainly private subscribers. Ideally, practically and legally speaking all pension schemes operating under different nomenclatures and modus operandis must generate nearly equal amount of pension for their beneficiaries whether they are MPs, MLAs, all types of constitutional and governmental and semi government employed retirees as well as organised and unorganised sectoral retirees. The logic and financial procedure for generating retirement age pension for all citizen of India must be same. Otherwise our country is going to remain country of malpractices and fragment based wasted interest society.

DEEPAK SINGLA

5 years ago

In the Tier-2 account of NPS if someone is not interested to continue Tier-2 account,then there is no wayout to close the Tier-2 account.One can withdraw amount from Tier-2 and then Tier-2 account will be freezed and not closed as there is no provision defined in the PFRDA guidelines to close the voluntary Tier-2 account.

D A Bhatt

5 years ago

This type of undue delay and unethical practices adopted and followed by NPS authorities at the cost of subscribers is illegal and corrective measures must be taken by NPS authorities on priority basis. But it appears that they are not interested in rationalising and correcting their subscription procedure. This is drawback of NAV based pension scheme for which authorities are boasting too much.

Prakash Chhotulal Patel

5 years ago

The point is well raised by moneylife.Even after investing by net banking the money is invested on 4th working day and in view of high volatility in equity market and in debt market investor has no idea how market will behave after 4 days.What is need of trustee bank for routing the money,why can't it be credited to fund manager.Hope PFRDA will do something on this for sucess of NPS

Siva

5 years ago

If I had a choice, I would n't even touch with a barge pole any scheme managed by a govt. agency. Saves a lot of headache and anguish in the later years.

Mamata Effect gone: Pension Bill passed

The newest addition to the Pension Bill allows subscribers to invest in stock market with a cap of 26% FDI and also provides old age income security for government employees

The Pension Fund Regulatory and Development Authority Bill (PFRDA), 2011 was passed by the Lok Sabha today in the Parliament. It was earlier introduced in Lok Sabha on the 24th March, 2011. The Bill has been in the works for almost a decade and got delayed due to vociferous opposition from various allies of UPA government such as the Left and later Mamata Banerjee of Trinamool Congres.

 

The newest addition to the bill allows subscribers to invest in stock market with a cap of 26% foreign direct investment. The Pension Bill also provides old age income security for government employees. It calls for a statutory regulatory body the Pension Fund Regulatory and Development Authority (PFRDA) under the provisions of the Bill. The legislation seeks to empower PFRDA to regulate the New Pension System (NPS).

 

 

In order to effectively invest and manage huge funds belonging to a large number of subscribers and to ensure the integrity of NPS, creation of a statutory PFRDA with well defined powers, duties and responsibilities is considered absolutely necessary and would benefit all NPS subscribers. Currently the NPS is implemented in 26 states with a subscriber base of 52.83 lakh and a corpus of Rs 34, 965 crore.  The NPS has been mandatory for all central government employees except the armed forces with effect from 1/01/2004. The PFRDA Bill authorizes the PFRDA to establish a Pension Advisory Committee by notification under Clause 44 of the PFRDA Bill, 2011. The object of the Pension Advisory Committee shall be to advise the Authority on matters relating to the making of the regulations under the PFRDA Act.

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