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(Maybe) Another upgrade for NPS

Navigating new withdrawal options and addressing challenges for a comprehensive retirement solution

(Maybe) Another upgrade for NPSAnand Kumar

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A couple of weeks ago, I wrote about a significant change in the National Pension System (NPS). The government has implemented a new withdrawal option for those enrolled in the National Pension System (NPS) upon retirement. Now, pensioners can decide to get a portion of their pension money as regular payouts until they reach 75 years old. These can be monthly, quarterly, biannual, or annual payments, depending on what the pensioner prefers. Up to 60 per cent of one's pension can be withdrawn in this manner. At first glance, this seems like a straightforward change.

It allows NPS subscribers more flexibility in how they access their retirement funds over time. Now, there's some talk - not officially yet - of 100 per cent of the amount being withdrawable in this manner. Currently, when an employee with NPS retires, they are required to utilise 40 per cent of their total pension savings to purchase an annuity from an insurance company, which provides a regular income stream. Buying this annuity is obligatory.

Changes to this part of NPS will amount to a significant upgrade to NPS. Any pension system is the sum of two distinct parts. The pay-in and the accumulation that goes on before a member retires, and the payout after retirement. At this point, even though there are still some challenges in its path, it's evident that the core qualities of an outstanding retirement system are very much in place in NPS. The cost is low, and most importantly, an excellent investment track record has been built up. That's crucial because the most critical aspect of a retirement system - its very reason for existence - is how well off the retirees will be in their old age. If a pension system can deliver on that strongly, then the rest falls into place with comparative ease.

Critics questioning the effectiveness of the National Pension System's investment model now have little evidence to support their doubts. The returns have been excellent, and the ultra-low fees associated with NPS fund management are clearly having a positive effect on yields. This low-cost advantage compounds over time, so as NPS savers remain invested for long periods, the benefits become more pronounced. Given the strong long-term returns and low-cost structure, the NPS seems difficult to criticise as a retirement investment program. Its performance speaks for itself in terms of providing savers with a solid outcome.

However, some grey areas need to be tackled to make the good-to-great journey of the NPS complete.

One major to-do would be to put a greater emphasis on equity. Now that we have an actual track record to analyse, the superiority of equity exposure in building long-term wealth has been demonstrated. It's clear that NOT putting longer-term investments into equity amounts to making NPS members poorer in retirement.

To enable members to be more financially comfortable in their old age, NPS must work to a higher equity exposure. Now that there is deferment of withdrawal as well as systematic withdrawal, NPS also has funds belonging to people who have already retired. Equity exposure for this part of the life cycle also needs a close look.

Another problem is the annuity. The logic is simple. Retirees want guaranteed support till death. The only practical way of providing this is annuity, but Indian insurance companies' annuity products are terrible. Someone in our system needs to have the wherewithal to force the insurance industry to fix this, though I don't know who that will be. For its part, NPS can remove the requirement for an annuity, as this newly talked about option envisages.

The other problem area is old age health cover. Healthcare cost is the timebomb in almost every retiree's future. At some point, it blows up and destroys the finances of a large proportion of retirees. Some fix to this problem could be part of the NPS post-retirement package.

To be fair, both annuities and healthcare are not really NPS's problems to solve. These two areas are both outside NPS's remit, but since both are actually key problems that retirees face, perhaps the pension system could use its clout and help get them fixed.

Also read: Make NPS automatic


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