Introduction
The much-awaited New Pension System (NPS) was launched on 1st May 2009 as a new saving revolution.This launch was eyed with a lot of cynicism and given the general apathy towards making an investments in today’s scenario, people just gave it a ‘ho-hum” look, barely suppressing a yawn. But if one gets over this mind block, it would do good to take a long, hard look at what NPS has to offer.
1. Eligible for all citizens between the age of 18 and 55 years,
2. After registeration for the scheme, a permanent retirement account number is issued.
3. You can subscribe to the NPS from any of the 285 points of presence (PoPs) or even online. 17 banks run this NPS – SBI and its associates, ICICI, Axis Bank, Kotak, Allahabad Bank, Citibank, IDBI, Oriental Bank, South Indian Bank and Union Bank. One can even go through LIC, IL&FS, UTI Asset Mgmnt and Reliance Capital. One also has the freedom to shift from one PoP to another.
4. There are six fund managers with whom subscribers can decide to go with – ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
5. Minimum annual contribution is Rs.6,000, meaning monthly it is Rs.500.
6. The minimum number of installments per year is four and there is no upper limit on the contribution per installment or on the number of installments.
7. The NPS is for private individuals and this means, from April 1, any individual will be able to start a NPS account with designated ‘point of presence’ and start saving up for a pension.
8. National Security Depository Limited (NSDL) is the record keeper and six entities selected by the Pension Fund Regulatory and Development Authority (PFRDA) are the fund managers.
They will have different plans under the NPS that, like a mutual fund would have a mix of equity, government securities and corporate bonds.
Risks and returns would obviously vary with each scheme. These plans will obviously have different combinations of risk and potential returns. You have to select only one pension fund and if you do not select any investment option, then it would automatically be channeled into a life-cycle fund.
Comparison with PPF
1. There is one major apparent disadvantage with the NPS. You cannot withdraw the money till you are sixty years old, except for critical illnesses and for building or buying one house.
2. Even at the age of 60, you can only withdraw 60% of the corpus as cash and the remaining 40% is used to buy an annuity. If you choose to exit from the scheme before the age of 60, then you can keep one fifth of the accumulated savings and invest the rest in annuities offered by the insurance companies.
3. Unlike the PPF, which earns you a fixed rate of return per annum, which is usually much higher than the bank saving rates, the NPS is more like a mutual fund. Here what you get at the end would depend on the amounts contributed and the investment growth up to the point of exit from NPS. Thus the value of your investment in NPS may rise or fall.
4. Currently, the gains made on NPS are taxable and there is no real clarity on the rate of taxation too. Call this lack of political will or sheer negligence, this blunder will have to be corrected or else NPS would be a non-starter.
5. There is also a lot of talk about the low cost. The annual cost of record-keeping is Rs.380, each transaction will cost Rs.6 and the investment management fee is 0.009% per annum. As against this, a mutual fund charges a load of 2% per investment. This works in favor of the subscriber as ultimately the returns in the long run would have lower outgo in terms of costs. But this advantage would come to the subscriber only as his accumulation increases. Initially, the cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, it would be a non-starter with the small savers.
Summary
So if you are 30 years of age, to earn a pension of Rs.2000 per month at today’s rate, you need to invest Rs.16,600 per year till the age of 60.
Wait for the clarity on taxation before taking the plunge. The tax angle would make or break this scheme.