New Pension System
Someone with a good pension plan exclaimed, “Goodbye tension, hello pension!” This of course, will be possible only when one plans well for retirement and starts saving early to have no tensions later
Dec 30, 2011
Someone with a good pension plan exclaimed, “Goodbye tension, hello pension!” This of course, will be possible only when one plans well for retirement and starts saving early to have no tensions later in life.
Investment Objective and Risks
The main objective of the new pension scheme is to offer tax deductions on investments up to Rs 1 lakh under Section 80C in a financual year and instill the discipline to save and invest towards old-age pension. The NPS is a defined contribution scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA) where the investment is to be maintained until maturity or retirement. On retirement, a part of the corpus will be allowed to be withdrawn as lump sum, and the balance will be mandatorily paid out as pension annuity.
• Between 18 and 55 years on the date of application
Account opening fee (Rs )
• One-time account opening cost and issuance of PRAN: Rs 50
• Initial subscriber registration and contribution upload: Rs 40
• Future fixed upfront charges: Rs 20
• Annual maintenance charges: Rs 350
• Each transaction or deposit: Rs 10
• Annual custodian charge: 0.0075-0.05 per cent of the fund value
• Annual fund management charge: 0.0009 per cent of the fund value
Minimum Investment (Rs )
• Initial contribution along with the subscription application is Rs 500
• Maximum deposit in cash is Rs 25,000 per transaction
• Minimum amount to be deposited annually is Rs 6,000
• Not guaranteed
• Non-resident Indian can be a member if KYC compliant and between age 18 and 55 years
• Facility is available
The New Pension System (NPS) is a government of India initiative to extend pension benefits to all Indian citizens. Any individual whether employed with private sector, self employed or professional can now avail of pension benefits and plan his or her retirement by enrolling in this scheme. The NPS is by far the least complicated, simplest and the lowest cost pension system.
As the scheme is regulated by the government of India, it is one of the most safe investment options with complete capital protection.
The NPS is a market-linked product which does not guarantee returns or inflation protection.
There are no guaranteed returns in the NPS.
The NPS is liquid and allows for early withdrawal. At present there is no guideline on loan against the NPS, but this may come into effect in the future.
There is no credit rating on the NPS funds.
If you retire before turning 60, you will be required to use 80 per cent of your savings in your Tier-I account to purchase the annuity. You will be able to withdraw the balance 20 per cent of your savings as a lump sum.
There are no guarantees on investment as the NPS is a defined contribution plan and the benefits would depend on the amount invested and the investment growth up to the point of exit from the NPS.
Tax deduction on investments up to Rs 1 lakh can be availed under Section 80C of the Income Tax Act in each financial year. However, as per the current law, the amount received at the end from NPS would be taxable.
• Value of your investments in NPS may go up or down depending upon the forces and the factors affecting financial markets in general.
• Tax laws may change, affecting the return on investment (ROI).
Where to open the account
You can open an NPS account with Allahabad Bank, Axis Bank, Bajaj Allianz General Insurance, Central Bank of India, Citibank, Computer Age Management Services (CAMS), ICICI Bank, IDBI Bank, IL&FS Securities Services, Kotak Mahindra Bank, LIC of India, Oriental Bank of Commerce, Reliance Capital, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of India, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, The South Indian Bank, Union Bank of India, UTI AMC and Post Offices.
How to open an account
• Visit a point of presence (PoP), fill up the prescribed form with the required documents which includes KYC compliance.
• Once registered, the Central Record Keeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN) unique to every person.
• Select the amount you wish to invest and the investment option.
If you are not KYC compliant you will need:
• 2 copies of identity proof
• 2 copies of address proof
• Proof for date of birth
• Self declaration indicating not a pre-existing member of NPS
• Coloured passport size photograph
• ECS signed by the banker if you plan to initiate one
• You get a welcome kit when you subscribe to the NPS.
• You also get an account number with statements detailing transactions.
Points to Ponder
• Long lock-in
• Taxability: The contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lump sum would be taxable as per the individual’s tax slab
• It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity) unlike EPF and PPF which are EEE (exempt, exempt, exempt at all stages)
• Comparison to mutual funds—Since the NPS is meant for retirement and financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds
NPS for Government Employees
All new government employees (central and state) who joined the services after January 1, 2004 will no longer have general provident fund (GPF) accounts and NPS account will be mandatory for them. NPS will work on defined contribution basis and will have two parts—Tier I and Tier II. Government employees can exit after age of 60 years from Tier I scheme and it will be mandatory for them to invest 40 per cent of pension amount to purchase an annuity through a life insurance company. In case a member wants to leave NPS before age of 60, the mandatory annuity will be 80 per cent of the pension amount.
• Tier I: Mandatory no withdrawal pension account—Monthly contribution will be 10 per cent of basic salary and equal amount will be deposited by the Government. This amount will be kept in a non withdrawal Pension Tier I account.
• Tier II: Voluntary withdrawal savings account—It will be voluntary Tier II withdrawal account from which individuals can withdraw money anytime. There will be no contribution from the Government in this account.
List of Pension Fund Managers (PFMs)• ICICI Prudential Life Insurance Company
• IDFC Asset Management Asset Management Company
• Kotak Mahindra Asset Management Company
• Reliance Capital Asset Management Company
• SBI Pension Funds
• UTI Retirement Solutions
Investment Options and Structure
Structure wise they are very similar to unit linked investment plan (ULIP) or unit-linked pension plan (ULPP). There will be different kind of funds options with different exposure to:
• Equity instruments
• Corporate debt
• Fixed income instruments
• Government securities
• Risky option: The higher allocation in this option will be in equity. To decrease the risk, equity investment is allowed only in index funds which track Sensex or Nifty with the equity exposure is capped at 50 per cent.
• Moderate: In this option most of the exposure would be to corporate debt and fixed income securities with some exposure in equity and govt securities. It will be moderately risky and rewarding.
• Safe: In this option mainly the investment will be done in government securities, and very little will be invested in equities.
• Default option: Allocation will be decided on your age, with high equity allocation when you are young, which reduce as your age increases. You can also decide your asset allocation as per your risk appetite.
Moreover, individual will also have choice to choose from 3 different asset classes: equity (E type), Govt securities (G Type) and Credit risk-bearing debt or fixed income based investments (C Type).
Active Choice investment: Investor can mix E, C and G type options as per their choice proportionately.
• Auto Choice investment: This is auto choice life cycle fund and the investment allocation will be done based of investor’s age. In this scheme, equity portion (Asset class E) will be 50 per cent till age 35 after which it will reduce 2 per cent per year until it becomes 10 per cent by age 55. Credit risk portion (Asset class C) will be 30 per cent till age 35 after which it will reduce 1 per cent per year until it becomes 10 per cent by age 55.
• Investor will have option of investing monthly or quarterly, but minimum 4 investments in a year is compulsory.
• As per the notification by PFRDA, currently only half of the investment can go into equities, even if investor chooses the equity type funds. This limit will only be reviewed after a year.
• There will be regular account statements to keep information transparent.
Tips and Strategies
• Use the switch option available between funds and fund managers.
• Track the performance of fund managers to allocate investments to the one who has the best performance as fund management costs are fixed.
Opening an online NPS account is easy if you already have an online account with institutions where the NPS has a point of presence (PoP). All you need is to log into your existing account with these institutions and open a NPS account without any additional documentation. For example, ICICIdirect.com and FundsIndia.com offer NPS online. You need to complete the paperwork which is allowed part online and part offline. As ICICIdirect is a designated PoP; it does not charge any additional fee when maintaining the NPS account; however, with FundsIndia one pays a service charge of Rs 4 for every transaction through them.