National Pension System (NPS) was extended to all Indian citizens by the Government of India on 01st May 2009, to provide income in the old age and thus financial security. However, it did not become as popular as expected although of it’s good intentions, mainly because of the fact that the Service Providers selected by the Government was reluctant to popularize it and didn’t had the proper infrastructure too. The general public as a result was at dark as to what the NPS is and also it’s benefits. However in the last 2 years, conditions has improved and I suggest everybody to join this scheme which has high merits in my opinion.
There are many reviews of the scheme in various other websites and some of them rubbishes the scheme off altogether while others advises to be cautious. In this article, my main aim is to give you the 10 reasons why I feel, every Indian citizen should join NPS as soon as possible. However, before I state the reasons why you should, I would like to give you the scheme details briefly.
NPS is governed by The Pension Fund Regulatory and Development Authority (PFRDA), set up by Government of India in 2003 and is managed by a Central Recordkeeping Agency (CRA) which is National Securities Depository Limited (NSDL). The general public will have to apply to Point Of Presence Service Providers (POP-SP), from whom they will get the customer service.
Once you apply by filling up the forms available with a POP, you will be assigned with Permanent Retirement Account Number (PRAN). You must open a Tier -I (Pension Account) account which is compulsory and Tier – II (Savings Account) which is optional. In Tier – I, withdrawals are not permitted and in Tier-II, withdrawals are permitted, just like a Savings Account. Tier -I account has to opened with Rs.500/- and every year minimum Rs.6000/- should be deposited into it. For any one contribution to Tier – I, the minimum amount accepted is Rs.500/-. If Tier-II account is also opened, an additional Rs.1000/- should be given and minimum Rs.2000/- should be maintained for every financial year ending at March 31st.
You can decide your Pension Fund Manager from the available choice of six Pension Fund Managers, who will manage the Fund by investing in Equity (Category E), Corporate Debts and Fixed Income Securities (Category C) and Government Securities only (Category G). If you do not exercise your option as to the Fund Manager and allocation in different categories, the default will be a Life-cycle Fund in which investment exposures are pre-defined in E, C and G categories based on your age.
You can exit in 3 ways from NPS: 1. In the unfortunate event of your death, your nominee will receive the entire NPS Pension Wealth in lump-sum.2. If you exit before the age of 60 years, 80% from Tier -1 must be converted to a life annuity from an insurance company and the balance 20% can be withdrawn. 3. On attaining age 60 and upto 70, you must purchase an annuity plan from an insurance company with 40% of Pension Wealth and the balance 60% can be withdrawn either in lump-sum or in a phased manner between 60 and 70 years of age.
One thing you must understand very clearly is that neither PFRDA nor NSDL nor any of the POPs are providing you the pension after you attain 60 years of age. The pension is provided by the insurance company, from whom you are purchasing the annuity plan. This pension or returns from the annuity plan that you purchase can be yearly, half-yearly or monthly for 10 years, depending upon the annuity plan you purchase.
Now I present to you my 10 Reasons to join NPS:
- Security: The scheme is operated by PFRDA, set up by the Government of India as a regulator for the pension sector. NPS was meant initially for the Central Government employees from 2004, which was extended to every Indian citizen. For the purpose of smooth functioning PFRDA has set up the NPS Trust to oversee the functions of the Pension Fund Managers. For smooth fund transfers across various entities under the NPS system, Bank Of India has been appointed as the Trustee Bank. As such all entities are under the Government of India and your money is as such in the safest hands. Security is guaranteed.
- Low Costs: The charges involved in opening and maintaining NPS is far low from any other Retirement Schemes offered anywhere. The cost of owning a retirement corpus will be very low.
- Forces Savings: This is so very important. We seldom think about our sunset years when we are still young and in our prime earning years. Where will the money for sustaining ourselves come from when we will not have any regular income and we will not be as physically strong as we are now. NPS forces us to save for our sunset years and also to get the benefits almost that of the Government Service-holders, that is getting a pension.
- Power of Choice: We have a choice to decide the Pension Fund Managers (PFM) and the Annuity Service Providers so that we can have more control over the income and growing of the Pension Wealth. It means if we are not satisfied with one PFM we can switch to another one. We can switch between PFMs once a year.
- No Loan Burden: You can withdraw from NPS before turning 60, yet the withdrawal will not be treated as a loan. The only cap is 20% of the Pension Wealth. You will still earn pension as the balance 80% have to be converted to an annuity. So zero loan burden in your sunset years.
- Insurance Benefit: Your nominee is entitled to get the entire Pension Wealth in the unfortunate event of your death, which in other words means insurance and security for your family. So not only will you yourself derive the benefit of having an income after 60, but your family will be protected too.
- Investment Friendly: You can invest as much as you want to with no upper ceiling. In Public Provident Fund (PPF) you have an upper ceiling of Rs.70000/- a year. But with no such restrictions in NPS, you can invest more when you have more income or invest less when you don’t. You can also invest more if your Fund Manager is doing well and invest less when not. The choice of investment lies with you. The minimum investment every year is also quiet less compared to insurance premiums.
- Portability: You can access your accounts anywhere with the Permanent Retirement Account Number (PRAN). You can also access it online.
- Tax Benefits: Investments under NPS are proposed to be listed under the list of investments to get tax deductions under Section 80C.
- SIP benefits: NPS is a good way to invest regularly under Systematic Investment Plan (SIP). You can average down your cost of ownership this way.
So, there you are. That’s the 10 reasons why I feel everybody should get themselves a NPS account. There is one disadvantage however, which is, there’s no assured income benefits like a normal pension. I think the flexibility to allocate investments across various instruments is more attractive than assured income benefits. There is also another disadvantage that, at 70, the entire Pension Wealth has to be withdrawn, again unlike normal pensions. But as NPS is just 2 years old andstill in it’s infancy, there’s still time for the Government to go out all the way out to woo the general public. Recent DTC changes makes me think so. Nevertheless, with all it’s inherent qualities, NPS should be availed by everybody.
Lastly I would like to state how much should you really put into this scheme? To know the answer, you should first decide how much pension you would like to get. Then assume a returns rate and time to ascertain how much you should invest into the scheme. To illustrate, let’s assume you would be satisfied with about Rs.20000/- monthly pension after 20 years, assuming you are 40 now. If we assume that the rate of return is 10% per annum and it will stay at that for 20 years, we would need to put Rs.3150/- monthly to grow a Pension Wealth of Rs.24,11,945/- after 20 years. So after 20 years, the corpus of Rs.24,11,945/- will yield Rs.20099/- monthly pension if the rate of returns is 10%. The monthly investment of Rs.3150/- in NPS should represent 10% of your monthly savings. So, if your monthly income is about Rs.60000/- and you are saving 50% of that, as I had written in ” Expenses and You “, which is Rs.30000/-, Rs.3150/- is 10.5% of your savings. So plan accordingly and invest about 10% of your monthly savings into NPS. If you don’t earn Rs.60000/- monthly now, you will be investing less off-course. But if your income increases in future you can invest more into NPS. That’s the beauty of the flexibility that we have here, unlike insurance plans where premiums are fixed.
That’s it. I hope you like my 10 reasons to join NPS. So go for it.