Investing in National Pension Scheme/NPS

Ever thought about investing in National Pension Scheme/NPS which is growing its popularity day by day. Most likely, today’s youth is more concerned about their retirement plan. This is because of the the economic instability and more risk to job stability of India. In the quest to fulfill their short term goal like buying a car, house or other amenities, the retirement savings plan is often ignored.

However, today’s generation should be focused enough to plan for their old age. Although PPF is the most beneficial and rewarding option to lock in your investment for retirement, there is yet another scheme which is also a good option for your greying age. The National Pension Scheme (NPS) is a government scheme that has been recently introduced in India (NPS actually launched with effect from 1 January, 2004). It takes into account the best practices that are being followed throughout the world with respect to Pensions. With its low Fund Management Fees, it is perhaps one of the cheapest market- linked form of retirement investment.

Note: It is mandatory for the State Government and Central Government employees to opt for this pension scheme. However, it is not a mandate for the private sector employees.

Here are some brief details before you think about investing in National Pension Scheme/NPS:

Launched By:

Pension Fund Regulatory & Development Authority (PFRDA)

Main Objective:

To build a retirement fund to be used during the retiring age of individuals.

Eligibility:

All Indian citizens between 18 and 55 years of age.
You can open an account either as an individual or through your employer. For government employees, this is a mandatory account.
Even NRI can open the NPS account.

Accounts offered by NPS:

NPS offers two kinds of accounts:

Tier-I account which is compulsory. It is basic pension account with restrictions on withdrawal.
Tier-II account which is voluntary. It is an add-on saving facility and you can withdraw money freely from this.

You can open a Tier-II account only if they have an active Tier-I account.

What is the minimum amount for investing in National Pension Scheme/NPS?

You need to invest a minimum of 6000 INR in any of the funds per year in Tier I account and 2000 INR in Tier II account. However, you can start off with a minimum of 500 INR at the time of account opening in Tier I account and 1000 INR in Tier II account.

Documents required:

a. Completely filled in subscriber registration form

b. Proof of Identity

c. Proof of Address

d. Age/date of birth proof.

NPS Charges:

Account opening fee of 50 INR for the central record-keeping agency(CRA) with an annual CRA fee of 190 INR.
Fund management fees of 0.0102% for the government employees and a ceiling of 0.25% for the private sector.
PoPs can charge 100 INR plus 0.25 per cent of the investment.

How do you open a NPS account?

Get a permanent retirement account number (PRAN):

You can get a PRAN from any of the point of presence service provider (POP-SP) which is mainly banks. Your PRAN will remain the same even if you change your Pension Fund Manager.

Note: Almost all the banks including public and private sector banks provide you with the facility to open a NPS account. Some of them are:

State Bank of India
Punjab National Bank
Axis Bank
ICICI Bank
HDFC Bank
Bank of Baroda
Yes Bank
Allahabad Bank
Canara Bank, etc.

You can get a detailed list of location from the given link: https://npscra.nsdl.co.in/pop-sp.php.

Once you register yourself, Central Record-keeping Agency (CRA) shall send your PRAN card and account details.

You can also check your status by accessing CRA website: https://cra-nsdl.com/CRA/ by using the 17 digit receipt number provided by POP-SP or the acknowledgement number allotted by CRA-FC at the time of submission of application forms by POP-SP.

Decide your asset allocation fund:

You can allocate your funds in in the following three types of asset classes:

Asset Class E – Invests in equity (cannot exceed 50% of the Investment)

Then , Asset Class G – Invests in Government bonds

Asset Class C – invests in a mix of liquid funds of Asset Management Companies, corporate debt, bank fixed deposits, rated bonds issued by corporates, banks, financial institutions, PSUs, Municipality and Infrastructure entities.

You can invest your funds in either of the two ways:

Active Choice: Here you decide the percentage of your funds that should be invested in each asset class. The only restriction is that only a maximum of 50 % of your funds can be allocated to equity i.e. Class E.

Auto Choice – Life Cycle Fund: It is the default option chosen if you are not very much aware of the percentage to be allocated to each asset class.Thus , depending on your age, the fund is invested in the accordingly in the asses classes:

Upto 35 years: 50% in Class E, 30 % in Class G and 20% in Class C.

Till 45 years: 30% in Class E, 20 % in Class G and 50% in Class C.

Upto 55 years: 10% in Class E, 10 % in Class G and 80% in Class C.

Choose your Fund Manager:

You can choose from the 8 pension fund managers provided by the PFRDA which are:

ICICI Prudential Pension Fund

LIC Pension Fund

Kotak Mahindra Pension Fund

Reliance Capital Pension Fund

SBI Pension Fund

UTI Retirement Solutions Pension Fund LIC Pension Fund

HDFC Pension Management Company

DSP Blackrock Pension Fund Managers

However, for government employees, the choice is between the LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions.

Withdrawal of Fund:

Once an investor turns 60, they can withdraw 60% of the amount to meet the financial goals in lump sum while 40% of the amount has to be invested in annuity from any of the seven IRDA-regulated annuity service providers which are :

Life Insurance Corporation of India (LIC)

SBI Life Insurance

ICICI Prudential Life Insurance

Bajaj Allianz Life Insurance

Star Union Dai-ichi

Reliance Life Insurance

Note: An annuity is a financial instrument which provides for a regular payment of a certain amount of money on monthly/quarterly/annual basis for the chosen period for a given purchase price or pension wealth.

Facts about NPS:

• You can have only 1 NPS account per individual.
• There is no contribution from the government like EPF.
• You can operate NPS account from anywhere. Even if your switch between the private sector and public sector or vice versa, there is no change in your NPS account.
• The equity exposure of the investor is decreased by 2% every year once they turn 35. So, from 50% the percentage goes down till it reaches 10%.
• You have to continue with a Fund Manager for at least 1 year,  before you decide to make a switch to some other fund manager.
• If you do not given any preference/choice, the fund is managed by SBI Pension Fund by default.
• If you do not maintain the minimum amount of 6000 per year in your Tier I account, your account is frozen. However, you can unfreeze it by paying a penalty of 100 INR along with the annual contribution.
• The Pension Fund Manager and the Investment options can be different for your Tier I and Tier Ii account.
• 80% of your funds needs to be invested in annuities if you want to discontinue with the NPS account before the age of 60.
• Entire fund is paid to the nominee/legal heir if the subscriber dies.
• You can defer (postpone) your annuity purchase for a maximum period of 3 years at the time of exit of 60 years.
• The volatility of interest earned every year in case of NPS account is more as compared to EPF and PPF account.

Benefits of NPS:

• There is a restriction on the withdrawal of the funds from the Tier I account. A part of it is spent on buying annuities to ensure regular monthly income during your retiring age.
• It is well-regulated, transparent and flexible scheme.
• The total cost of the NPS, including the fund management fee, will not exceed 0.5% per year.
• Performance and portfolios of Fund Managers are regularly monitored by the NPS Trust under the overall supervision of the PFRDA
• Best of all, it is you who decides the percentage of the corpus that goes into equity, corporate bonds and government securities.
• You have the flexibility to alter your Pension Fund Manager, your investment options and to realign the percentages of investment made in the asset classes.
• Most likely, it is more customized than any other mutual fund.
• Nonetheless, it offers tax benefit under Section 80CCE.
• You have the facility to opt for 3 nominees for your NPS account. You can even change your nominee at a later stage.

Disadvantages:

• Funds are taxable on withdrawal.
• Restriction on withdrawal of fund before maturity from Tier I account.
• There is no tax benefit for Tier II account.
• An individual cannot make further contribution if he/she reaches the age of 60.

Note: In the year 2012-13, NPS gave a return of 11. 24 % (for Central Government) and 11.82% (for State Government), however, in the year 2013-14, NPS gave a return of 5.37 % (for Central Government) and 4.95 % (for State Government). On the other hand, both EPF and PPF gave a stable interest of around 8.5%.

Tips:

Do not go for small investment or SIP method of investment while investing in NPS. You will be levied more charges.