Pension in past had always been the most important & attractive aspect of opting for a Govt. job. It provides people with a sense of financial security when they retire. But with time it became burdensome for the governments to provide guaranteed pensions to all their employees. Govt. introduced the idea of National Pension System (NPS) for all the central & state employees as well as all the other citizens of India.
The National Pension System (NPS) is a voluntary, long-term retirement savings scheme introduced by the Indian government in 2004. It is based on disciplined & regular investing during our earning years & option to get money in the form of pension when we retire or need it at a later age. Govt. has approved few investments products & funds which are structured & well regulated. These funds are managed by Pension Fund Managers who are mostly mutual fund companies. At the time when the investors seeks pension the fund is transferred to insurance companies to start pension.
The contributions also get tax deductions under the old tax regime.
Basic features of NPS
Eligibility Age | 18-70 years
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Minimum Amount | A subscriber is required to make initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
Tier I: Minimum amount per contribution – Rs. 500 Minimum contribution per Financial Year – Rs. 1,000 Minimum number of contributions in a Financial Year – one Over and above the mandated limit of a minimum of one contribution in Tier I, a Subscriber may decide on the frequency of the contributions across the year as per his / her convenience. Tier II: Minimum amount per contribution – Rs. 250 No minimum balance required.
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Investment Options | Equity Fund, Corporate Fund, Government Fund, Alternative Fund
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Returns | Market-linked, varied on market performance
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Portfolio Types
Investors are given 2 options to create their investment portfolios in NPS. Investors who think that they may decide their asset allocation themselves to create an investment portfolio, may do on their own. While for investors who don’t want to take a chance themselves and want to go for pre-defined portfolios, may opt another option to select portfolios.
Active choice:
Unlike traditional investment products, NPS offers you with the flexibility to design your own portfolio. Depending on your risk appetite, you can design your portfolio by allocating Funds amongst available four asset classes. This is called Active Choice.
Following are the four asset classes are available under Active choice:
- Equity or E
- Corporate Debt or C
- Government Securities or G
- Alternative Investment Funds or AIF
Auto Choice:
At times designing your portfolio can be a little delicate and time consuming. NPS gives you the flexibility to opt for a dynamic and automatic allocation of your portfolio in case you do not want to exercise an Active choice. This option is called the Auto choice.
In Auto choice, your money will be invested in asset classes – E, C and G – in defined proportions based on your age. As individual’s age increases, exposure to Equity and Corporate Debt is gradually reduced and that in Government Securities is increased.
Depending upon the risk appetite of subscriber, there are three different options available within Auto Choice-Aggressive, Moderate and Conservative.
- Aggressive (LC-75) – Maximum Equity exposure is 75% up to the age of 35
- Moderate (LC-50) – Maximum Equity exposure is 50% up to the age of 35
- Conservative (LC – 25) – Maximum Equity exposure is 25% up to the age of 35
Investors can pick the pension service from various options such as, LIC, HDFC, UTI and so on.
While NPS offers several benefits, it also comes with its own set of limitations. We will delve into the advantages and limitations of the National Pension System.
Advantages of NPS
Tax Benefits | NPS offers Tax Benefits under the Section 80C and CCD(1A) up to Rs. 1.5 lakh can deduct and in CCD(1B) Rs. 50,000 can be deduct. |
Flexibility | NPS contributes to flexible in nature as the investor can choose the amount of their investment according to their suitability, income and financial goals.
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Investment Options | NPS offers various investment options which includes equity funds, corporate funds, government funds this helps in spreading risk and yield higher returns for longer period.
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Low Cost | NPS is relatively low as compared to other retirement saving schemes and this leads to chances of better growth.
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Voluntary | NPS is voluntary in nature as the investor can contribute to schemes of any company of his choice and can change the amount, he wants to set aside and save every year.
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Simple | Investors can easily and in a simple manner can open the account in any one of the POPs (Point of Presence) or through eNPS.
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Portable | Investors can operate the account from anywhere and anytime. They may continue to contribute even when they change employers.
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Regulated | NPS funds are managed by the Pension Fund Managers and regulated by the Pension Fund Regulatory and Development Authority.
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Limitations of NPS
Limited Withdrawals | NPS is treated as a long-term scheme and there is a restriction on premature withdrawals. Some partial withdrawals are allowed under some specific circumstances depending on the certain rules and regulations.
After age 60 years or more, you may withdraw 60% of the accumulated corpus as a lumsum amount. Rest 40% amount will be paid in the form of annuity or pension through an designated life insurance company of your choice.
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Market Risk | Most NPS investment options invest in equity and are subject to market fluctuations which offers higher return and volatility in investment value. Risk-averse investors must be aware of all these things before investing in those schemes.
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Lock-in Period | This can be biggest limitation of NPS, as investors cannot withdraw funds for emergencies or for any other financial goals before the age of 60. |
Account Opening Restrictions | The investor can maintain only 1 NPS account through a NPS CRA login for their lifetime.
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Complexity | Many investors are not aware of these financial investment options like equity, debt and so on. They fail to choose the best suitable asset allocation for them.
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Conclusion
The National Pension System (NPS) has its advantages as well as limitations. NPS suitability depends on individuals’ financial goals, risk tolerance and retirement planning needs. It offers flexibility, tax benefits and faces the market risk and having restrictions on withdrawals. Therefore, it is crucial for investors to consider the retirement goals and must consult with financial advisors before taking or opting for the NPS investment option.
It is a scheme undertaken by the central government to promote & enhance retirement savings and it is likely that NPS will play an important role in ensuring financial security during retirement years.
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