National Pension System- Plan your retirement correctly

Retirement planning is a very important aspect of financial planning wherein one needs to save in order to enjoy the desired post-retirement lifestyle. In India, till recently, the concept of retirement planning was restricted to the organized sector (salaried class) while there was no such arrangement for the large unorganized work force. To enable individuals to plan and prepare for post retirement life, the Pension Fund Regulatory and Development Authority (PFRDA), the regulator of pension sector in India, launched the National Pension System (NPS) in January 2004. The scheme was first introduced for government recruits and then in May 2009 for the general public.

About NPS

NPS is available to all Indian citizens between 18 to 55 years of age. It is a defined contribution based product where returns are market determined (not fixed) while periodic contributions are fixed (defined). For example, one can invest Rs 1,000 every month (defined contribution) in the NPS which can increase every year based on one's income levels. The accumulations would be invested in the chosen asset classes by professional fund managers. The final corpus available at the age of 60 years would depend on how the markets (equity and debt) have performed over the years and the value of the pension will depend on the size of this corpus. However, there is no assurance on the quantum of pension value to the beneficiary while opening an NPS account.

Opening an NPS account

An NPS account can be opened by filling up the subscriber registration form available at any of the 34 registered Points of Presence (PoP). These PoP include post offices, offices of Life Insurance Corporation of India (LIC), branches of public sector and private sector banks and some other large financial entities. The detailed list of PoP is available on www.pfrda.org.in and www.npscra.nsdl.co.in . An individual needs to submit the duly filled registration form along with the required Know Your Customer (KYC) documents with any of the above entities. Once registered, the subscribers get a unique Pension Retirement Account Number (PRAN), which is used for operating the account.

Working of NPS

An NPS account holder needs to contribute a minimum of Rs 6,000 per annum (Rs 500 per month). This money is managed by designated fund managers in the chosen investment option for a period till the subscriber turns 60. Once 60, the account holder has the option to withdraw 60% of the accumulated balance and the remaining 40% needs to be compulsorily used to buy an annuity1 from a life insurance company. If the account holder exits before 60 years of age, he has to invest 80% of the accumulated saving to purchase an annuity and the remaining 20% may be withdrawn as lump sum. In the unfortunate event of death of the account holder at any time, the nominee will have an option to receive 100% of NPS pension wealth in lump sum.

The following are the three key operational aspects of the NPS

1. Investment options - NPS investments are categorized into three asset classes - E (equity), C (corporate bond fund) and G (government securities fund). From a risk/ return perspective E is a high risk and high returns portfolio, C is a medium risk moderate returns portfolio while G is a low risk, low returns portfolio. An investor is free to allocate money towards each asset class based on risk bearing capacity.

2. Professional fund managers - The NPS has professional fund managers who manage the corpus and operate as per PFRDA guidelines. A subscriber has the option of choosing fund manager. The choice can also be altered subsequently by switching between fund managers. NPS currently has six fund managers viz., ICICI Prudential Pension Fund, IDFC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, and UTI Retirement Solutions.

3. Auto choice scheme - If an investor is unable to make a choice of asset classes, the same can be routed to the 'Auto Choice' scheme or Lifecycle fund by default. Under this option, at the lowest entry age (18 years) the asset allocation would include 50% in E, 30% in C and 20% in G till the age of 35. The ratio of investment in E and C will then decrease annually, while the proportion of G will rise. At 55 years, G will account for 80% of the corpus, while the share of E and C will fall to 10% each.

Costs involved in NPS

The cost structure of NPS is very transparent and clearly defined. It includes:

i) account opening charge of Rs 50,

ii) annual account maintenance cost of Rs 350 and per transaction cost of Rs 10,

iii) service charge by the PoP of Rs 40 for registration and Rs 20 per transaction,

iv) fund management charge of 9 paise for every Rs10,000 of funds under management and

v) custodial charges of 0.0075% p.a. for electronic investments and 0.05% p.a. for physical investments. Despite the multiple charges, NPS is one of cheapest pension products available in the Indian financial market.

Taxation

As per the budget for 2011-12, investments in NPS up to 10% of an individual's salary would be eligible for income tax deductions over and above the Rs 1.20 lakhs allowed under Section 80C. For companies, contributions up to 10% of the employee's salary would be allowed as a business expense. However, withdrawal of any amount from NPS is taxable as per income tax slabs.

NPS Performance

NPS has been in existence for over 2 years. The returns generated by the fund managers across asset classes have witnessed significant variation.

Fund	Fund Returns Range (1 year)	Fund Returns Range(Since Inception)*
Equity Fund (E)	8.05 - 11.89%	8.36 - 17.85%
Corporate Bond Fund (C)	6.26 - 12.66%	6.45 - 11.81%
Government Securities Fund (G)	6.97 - 12.52%	4.91 - 11.64%

 

 

 

 

 

 

*Since May 1, 2009

The performance so far reflects that NPS has given better returns than traditional saving instruments. An extension of this performance over longer time frames is expected to generate sizeable corpus for retirement savings. Fund Manager wise details are available on www.pfrda.org.in

Recent Developments

To expand reach of NPS, the government introduced 'Swavalamban' scheme, which would contribute Rs 1,000 p.a. to every NPS account opened from FY11 till FY16. Further, 'NPS Lite' was introduced for weaker sections of the society to ensure ultra low administrative and transactional costs and follows a 'group' model. Recently, the Bajpai committee set up by PFRDA suggested lowering costs of NPS for low investment accounts and giving greater financial incentives to entities selling NPS.

Conclusion

Post the launch of NPS Lite, the NPS subscriber base has almost doubled from about 1 million a year ago to about 2 million in April 2011. While government employees constitute 68% of the subscriber base, the rest are through NPS lite and other unorganized sector subscribers. However, there is substantial scope for improving the penetration through investor education for voluntary participation.

It is very important for all individuals to do retirement planning at an early age. NPS is an ideal option. NPS is simple product available all over India at a low cost. The 'Auto Choice' option enables subscribers to participate in equity at an early age and can help in wealth creation over a longer horizon. The performance of NPS so far is clear indication of the usefulness of the scheme to generate higher inflation adjusted returns for a safe and secure retired life.