NPS- Is it the Best Retirement Plan?

What is NPS: It is National Pension Scheme which is Government regulated under PFRDA (Pension Fund Regulatory and Development Authority). It was launched in 2004 only for Government employees but in 2009 it was made open for all. You can opt NPS even you are a private company employee or a business owner. It is designed for Retirement and Pension planning. It is considered as a good retirement option, so let’s understand it in details-

How NPS works: If you want to plan your retirement systematically and your age is between 18 to 65 years, you can open an NPS account. Through NPS you can choose middle path in between being too risky and too conservative. You can avoid too much risk of Stock market and Real Estate and you can also avoid being too conservative like investing in FDs, Debt funds etc. It gives you a balanced path on one hand and it is also a very good Tax saving instrument. NPS investment is balanced so its returns are also variable; it is around 10% CAGR historically for past 10 years. You can open NPS account online on e-NPS website and offline you can open by going PoP-SP near you. Almost all banks come under the PoP-SP for NPS. The account opening charges are Rs. 500.

Investment choices in NPS: Investments through NPS is allocated to different asset classes; there are 4 asset classes- 1.Equity 2.Corporate Bonds 3.Government Bonds and 4. Alternative Funds (RIETs, IITs, AIFs etc.). You have to choose in which asset classes you want invest and how much allocation you want to give in each asset class. You have 2 choices to invest in NPS-

1. Active Choice: This is a choice in which you give the asset allocation percentage but there is an Upper limit on maximum allocation for asset class Equity and Alternate Investment funds. Maximum exposure for Equity can go upto 75% and for Alternate investments it can go upto 5%, for Corporate and Government Bonds there is no upper limit. This upper limit on Equity is also depend on your age, this maximum exposure of 75% is allowed till the age of 50 years and with increasing age by one year, 2.5% of upper limit is reduced, for example if you are 51 years Equity upper limit will be of 72.5% and at 52 it will be 70% and so on. Within these rules you can actively tell Fund manager to manage your NPS investments, it needs your active involvement that’s why it is Active Choice.
2. Auto Choice: If you don’t want get into this % allocation brain twister, you can go for Auto choice. Here you have 3 choices of Life cycle funds- First is Aggressive; Second is Moderate; Third is Conservative. You don’t have to decide % allocation, it is already pre-decided, you only have to choose the Life cycle funds. Below is the table of upper limit of different asset classes with different Life cycle funds-

Life Cycle Funds	Aggressive			Moderate			Conservative
Age	Asset Class E	Asset Class C	Asset Class G	Asset Class E	Asset Class C	Asset Class G	Asset Class E	Asset Class C	Asset Class G
Upto 35 years	75	10	15	50	30	20	25	45	30
36 years	71	11	18	48	29	23	24	43	33
37 years	67	12	21	46	28	26	23	41	36
38 years	63	13	24	44	27	29	22	39	39
39 years	59	14	27	42	26	32	21	37	42
40 years	55	15	30	40	25	35	20	35	45
41 years	51	16	33	38	24	38	19	33	48
42 years	47	17	36	36	23	41	18	31	51
43 years	43	18	39	34	22	44	17	29	54
44 years	39	19	42	32	21	47	16	27	57
45 years	35	20	45	30	20	50	15	25	60
46 years	32	20	48	28	19	53	14	23	63
47 years	29	20	51	26	18	56	13	21	66
48 years	26	20	54	24	17	59	12	19	69
49 years	23	20	57	22	16	62	11	17	72
50 years	20	20	60	20	15	65	10	15	75
51 years	19	18	63	18	14	68	9	13	78
52 years	18	16	66	16	13	71	8	11	81
53 years	17	14	69	14	12	74	7	9	84
54 years	16	12	72	12	11	77	6	7	87
55 years and above	15	10	75	10	10	80	5	5	90

E is Equity, C is Corporate Bonds and G is Government Bonds

No Alternative Investment allowed in Auto choice.

All figures in above table are in %.

 

You can switch your choice from ACTIVE to AUTO and vice versa, you can also switch Life cycle funds within Auto choice from Aggressive to Moderate to Conservative and vice versa, NPS allows this switching twice a year.

 

Fund managers for NPS: The regulatory body PFRDA has appointed 7 fund managers who manages your invested money in NPS. You can choose any one of the Fund manager and you can also switch the fund manager in later stage too. These 7 Fund managers are-

1. LIC Pension Fund Ltd.
2. SBI Pension Fund Ltd.
3. UTI Retirement Solutions Ltd.
4. HDFC Pension Management co. Ltd.
5. ICICI Prudential Pension Fund Management Co. Ltd.
6. Kotak Mahindra Pension Fund Ltd.
7. Aditya Birla Sunlife Pension Management Ltd.

What is Annuity and its processing under NPS: Annuity is a fixed amount that is paid to subscriber per year (it is monthly for NPS) for the rest of the life once it is started. In NPS you can start annuity AFTER the age of 60 years. You can maximum withdraw the amount of 60% of total corpus during the withdrawal and 40% of the remaining corpus you have to buy the Annuity which is called Purchase price of Annuity. Annuity is around 6-8% p.a. of Purchase price depends on your Annuity Service Provider (ASP). If you have less than Rs. 2 lakhs of total Corpus at the age of 60 years you can withdraw whole amount, no condition of buying annuity. If you want to withdraw BEFORE the age of 60 years you can withdraw upto 20% and rest of the amount goes in buying Annuity. If you have less than Rs. 1 lakh of corpus you can withdraw the whole amount in this case.

The following insurance companies are ASPs appointed by PFRDA for NPS-

1. LIC India
2. SBI Life Insurance Co. Ltd.
3. ICICI Prudential Life Insurance Co. Ltd.
4. HDFC Standard Life Insurance Co. Ltd.
5. Bajaj Allianz Life Insurance Co. Ltd.
6. Star Union Dai-ichi Life Insurance Co. Ltd.
7. India First Life Insurance Company Ltd.

Plans for annuity for NPS: There are 5 standard plans available for annuity for NPS-

1. Annuity for life: The regular pension comes till the death of annuitant once annuity started. No amount other than Annuity will be given anytime.
2. Annuity for life with return of purchase price on death: Regular annuity payouts provided till death of annuitant and the purchase price is returned to the nominee.
3. Annuity payable for life with 100% Annuity payable to spouse on death of annuitant: On death, Annuity is paid to the spouse during his/her life time. In case spouse death happens before the annuitant, payment of Annuity will cease after the death of the annuitant.
4. Annuity payable for life with 100% Annuity payable to spouse on death of annuitant with return on purchase of Annuity: On death of the annuitant, Annuity is paid to the spouse during his/her life time and purchase price is returned to the nominee after the death of the spouse.
5. Default Annuity Scheme for Government Employees: The Annuity payouts would be made to Annuitant and his/her spouse for lifetime. Thereafter these payouts would be made to mother and after her, to the father. On the death father the purchase price goes to surviving Children. If no children are there, it will go to legal heir.

Exit and Withdrawals: You already have seen the Exit for Annuity in above section for BEFORE and AFTER age of 60 years. The first condition for Exit is- completing at least 10 years in NPS, means you can Exit only after 10 years of investing. In NPS, there is also an option of partial withdrawal, you can withdraw 25% of you investment which you have contributed (not from your Employer) if you have completed 3 years of investing. So for Exit atleast 10 years of investing and for partial withdrawal at least 3 years of investing should be completed. For partial withdrawal, NPS has list of valid reasons for which you can withdraw like Children’s marriage/education, critical illness in family, higher education, skill development and Buying or constructing your House. Without these reasons, you cannot withdraw any amount.

Tax Benefit for NPS: The NPS is most attractive scheme due to its Tax Benefit feature. You can save a lot of Tax by investing in NPS.

1. Section 80CCCD(1)- It is part of Section 80C whose upper limit is Rs. 1.5 lakh, you can claim deduction of Rs. 1.5 lakh through NPS under this section.
2. Section 80CCD(1B)- You can additionally claim Rs. 50000 under this section so upto Rs. 2 Lakhs of deduction you can claim under these 2 sections.
3. Section 80CCD(2)- If you are a working employee and your company’s payroll has the section of contribution in NPS from employer in your behalf, you claim deduction under this section. It can be maximum 10% of your (Basic +DA).
4. EET rule for NPS- NPS falls under Exempt, Exempt and partially T First Exemption is your Investment, it is not considered in Taxable Income. Second, Exemption is Income accrued. Third, partial Exemption is final Maturity amount. The lumpsum amount you withdraw is exempted, but the Annuity comes to you as your pension is Taxable. So everything is exempted only Annuity is taxable as per you Tax slab.

Is it a Best retirement option: NPS is designed for retirement and retirement age is a stage when you need the money most with full safety and security. NPS is best retirement plan for those who fall in following 2 points:

1. If you are less financially disciplined and have tendency to do expenses in luxuries/wants, due to NPS big Lock-in period you have to follow disciplined.
2. If you don’t want to go for conservative investments and also don’t want go for risky investments and want balanced investments for retirement planning.

If you think these 2 points matches your financial planning you should opt for NPS.

Final words for retirement planning: The bottom line for retirement planning is that whether you opt for NPS or not, you have to plan for your retirement. Ideally it should start from your very first salary. So plan your retirement today if you have not started yet.

Finance Tapasvi