National Pension Scheme: Should you invest or skip?

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NPS: Should you invest or skip?
If you are looking at pension to sustain you when you decide to retire, then you need to take a look at the National Pension System.

The National Pension System (NPS) is an initiative of Pension Fund Regulatory and Development Authority (PFRDA), the apex body established by Government of India to regulate and develop the pension sector.

What is the New Pension Scheme?

The New Pension Scheme is a defined contribution-based pension scheme, launched by the government, which has gone effective from April 1, 2009. One can regularly invest money in this and get a lump sum at retirement and a fixed monthly income for the lifetime.

What are Tier I and Tier II accounts in the NPS?

Tier-I of the NPS constitutes the non with drawable pension account, which will become operational from that date and incase of Tier II where withdrawing is allowed will become operational in about six months

Tier II ‐ A voluntary savings facility which provides liquidity to subscribers, i.e subscribers can withdraw their savings whenever they wish, which is optional.

Amount that can be invested in NPS

o Minimum amount per contribution: Rs 500
o Minimum contribution per year: Rs 6000
o Minimum number of contributions per year: 4
o No maximum contribution
o No periodicity prescribed

One can contribute through cash, local cheque or DD can be accepted, but transaction booked after realization of cheque or DD. Outstation cheques not accepted.

Asset Allocation and Categories in the NPS

The government has appointed six pension fund managers to manage NPS who will invest the pension fund further to generate return on investment.

Pension fund managers will manage 3 separate schemes, each investing in a different asset class. These assets classes are :

  • Equity ( investment will be done in equity related products like index funds that replicate the Sensex. 
  • Government securities (Will invest only in Central and State government bonds. 
  • Credit risk bearing fixed income instruments ( will invest in Fixed income securities of entities other than the government 

On the basis of the recommendations of the NPS Trust and on advice from the Government, it has been decided that investment by an NPS participant in equity would be subject to a cap of 50%. Also the fund managers will invest only in index funds that replicate either BSE sensitive index or NSE Nifty 50 index. The subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested in three asset class. In case the subscriber is unable/unwilling to exercise any choice as regards asset allocation, his/her contribution will be invested in accordance with the ‘Auto choice' option. In this option the investment will be determined by a predefined portfolio.

However, there is no guarantee on returns since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.

Withdrawal Options

Normal Retirement Age (NRA) of 60 years - You will be required to invest in annuities offered by insurance companies ateast 40% of your pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner; in case, you opt for a phased withdrawal.
Before 60 years of age- In such case, you will have to compulsorily annuitize 80% of your accumulated pension wealth. The remaining 20% can be withdrawn as a lump sum.
However, any amount lying to the credit at the age 70 should be compulsorily withdrawn in lump sum.

Advantages of NPS

  • NPS is cheapest when compared to current retirement products and it is also easy to transact.
  • The returns generated will be higher when compared to debt instruments (due to equity constituent in the investment).
  • Additional tax saving benefit if both employee and employers contribute.
  • Cost on the NPS are really low. The annual fund management charge is 0.25%.

Drawbacks

  • At the time of withdrawal, the lump sum would be taxable as per the individual's tax slab .
  • It does not permit flexible withdrawals when compared to mutual funds.

Conclusion

This is a good offer made by government and seems like a good option for people who want to invest for their retirement.

Latest: More flexibility in NPS withdrawal

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Read more about: nps
Story first published: Thursday, August 16, 2012, 10:43 [IST]
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