What is the National Pension System? How should you invest in it?
The National Pension Scheme (NPS) is an initiative of the government to extend pension benefits to all Indian citizens. While the scheme was initially rolled out for the new government recruits (except armed forces), the horizon of the same has been expanded and all Indian citizens can invest in the same. To know more, here is an essential guide to NPS.
You can open two types of accounts under NPS - Tier I and Tier II. NPS - Tier I is meant for retirement savings where you have to make a minimum contribution of Rs 500 while opening the account. The investors in this scheme can withdraw up to 60 per cent of the total accumulated amount only after the age of 60 years. However, investors can make partial withdrawals in cases when the subscriber has a critical illness, child education, wedding expenses, buying or constructing a house. The remaining 40 per cent of the corpus is utilised to buy annuities to secure a regular monthly income source in the form of a pension.
Investors having an NPS Tier I account can open an additional Tier II account. A Tier II account is a voluntary savings facility with flexible withdrawal and exit rules.
Investors of NPS Tier I can invest in various asset classes such as equity, corporate debt, government securities and alternate investment funds. The investors have two investment options - auto choice and active choice.
The auto choice allocates between equity and fixed income automatically, depending on the age of the investor. It is further subdivided into Aggressive Life Cycle Fund (LC75), Moderate Life Cycle Fund (LC50) and Conservative Life Cycle Fund (LC25), with the maximum equity allocation being 75, 50 and 25 per cent, respectively, up to the age of 35. Thereafter, the equity allocation reduces every year.
On the other hand, the active choice gives the flexibility to the investor to decide the allocation between equity and fixed income. Investors up to the age of 50 can allocate a maximum of 75 per cent to equity.
If you still have 10-12 years to your retirement, we suggest you invest the maximum possible of your retirement accumulation in equities. These investments will help you generate inflation-adjusted returns. Permissible equity allocation in NPS under active investment option up to the age of 50 is 75 per cent, while it is 50 per cent up to age 60. Post this, the permissible equity allocation starts tapering down and by the time you reach 60, you can't invest more than 50 per cent. However, you can continue to stay invested in NPS till the age of 75 and need not necessarily withdraw the corpus at the age of 60. If you do not need this money at the age of 60 or have another corpus/source, you can well continue to hold your investment in NPS with 50 per cent of allocation in equities as your growth and long-term allocation.