Sarbajeet K Sen
The Pension Fund Regulatory and Development Authority (PFRDA) has recently outlined steps that subscribers of Employees’ Provident Fund (EPF) should take to transfer funds from the PF accounts to the National Pension System (NPS).
Should you consider transferring your PF savings to the NPS and if so, what are the things you should keep in mind while making the move?
Investment and personal finance advisors say that both the schemes have their own importance and a salaried individual should ideally split retirement savings between the two competing instruments, preferably in equal proportions.
“A salaried employee must keep his or her investments equally divided between EPF and NPS so that he has the advantage of both the schemes,” Anil Chopra, Group CEO & Director, Bajaj Capital, told Moneycontrol.
Chopra suggests an equal division of retirement savings between the two schemes. “If you split your contributions to PF and NPS in the ratio of 50:50, your return potential will go up due to higher equity investment in NPS and also at the time of retirement you will get a decent corpus for your other social obligations and a regular pension as well from your NPS,” he said.
While equity investment of an individual’s PF corpus can go up to 10 percent at present, under NPS a young subscriber can choose a life-cycle fund that offers equity portion of 75 percent which gradually decreases as one ages in favour of debt.
“A young subscriber under 40 years should use NPS as the main vehicle for wealth creation and retirement planning as well as for pension planning. This category has a long time horizon and hence they can opt for high allocation towards equity in their NPS,” says Chopra.
NPS has a wider reach since an account can be opened by any individual while EPF membership is restricted to salaried employees of organised sector. Thus, every EPF member can also have a NPS account whereas vice-versa is not always possible as NPS account can also be opened by a businessman, self-employed professionals and even workers working in establishments where EPF is not applicable.
Manoj Nagpal, CEO, Outlook Asia Capital, also points out that age and risk-taking ability should be the main criteria for deciding on the allocation between the two schemes. “Risk profile, age, interest rates and taxation change continuously. One should make the decision based on these criteria. Market-related volatility and returns are not suitable for everyone and the more conservative investors should continue with the EPF,” Nagpal said.
However, he, too, is of the opinion that a salaried person should have both EPF and NPS accounts as they serve different purposes of guaranteed return and market-related return.
Nagpal said that one should also keep the liquidity factor in mind, especially at the time of retirement. “Liquidity in EPF is currently higher in terms of complete corpus being available at the end of the employment. On the other NPS has limited liquidity. Thus, only that portion of the allocation should be used for NPS,” he said.