The good, the bad & the ugly of the “New Pension Scheme”
May 1st 2009 would go down as a landmark event in the history of the Indian Financial Sector as it is on this day that the Government launched The “New Pension Scheme” or NPS as it is commonly known.
Who will regulate the NPS?
Launched by the Pension Fund Regulatory & Development Authority (PFRDA), the proposed regulator for Pension Funds in India, the New Pension Scheme or NPS heralds the beginning of Pension Reforms in India that aims to bring economical, well regulated retirement options to the Indian masses.
Who are the fund managers? Fund Managers are the entities who will invest & manage our pension money. Currently there are 6 Fund Managers to choose from namely, ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI & UTI & one has the option to choose between any of these six fund managers as also the option to switch between them once in a year.
What are the Investment options available? The NPS offers you two approaches to invest your retirement money:
- Active choice
- Auto choice (Lifecycle Fund)
In the first approach, the investor can choose between 3 investments options depending upon his/her tilt towards equity or debt. A maximum of 50% equity exposure is allowed in the most aggressive option else one can choose the conservative option with minimal equity exposure. However, in case one is unable to make his /her mind on what option is better, one can go for the 2nd approach wherein his/her age decides the equity/ debt allocation.
Where can one apply for buying NPS?
There would be 22 points of presence or entities from which one can buy pension plans. Allahabad Bank, ICICI Bank, Axis Bank, CAMS, LIC, UTI & SBI & all its Subsidiary banks are some of the points of presence where one can apply for the NPS.
Who can apply?
Any Indian Citizen, whether resident or not, who is between 18 & 55 years of age at the time of application can apply for the NPS after fulfilling the KYC norms.
What is the minimum contribution?
Minimum amount per contribution is Rs. 500 & minimum 4 contributions are required per year requiring a minimum contribution of Rs. 6,000 per annum.
Can one withdraw the amount invested in NPS at will?
No. PFRDA has fixed the normal retirement age as 60 years. Accordingly, if wants to withdraw any amount before attaining 60 years of age, one can withdraw a maximum 20% of the amount accumulated (known as pension wealth) & the balance 80% compulsorily gets converted into a pension corpus from which one shall get annuities. After attaining 60 years of age, one has the option of withdrawing a maximum of 60% of the amount accumulated (pension wealth) & the balance 40% gets converted into a pension corpus from which one shall keep getting annuities.
What if the pensioner dies prematurely?
Only in case of unfortunate death of the pensioner, the nominee is allowed to withdraw the entire 100% of the amount accumulated (pension wealth).
The good At last the non-salaried Indian has something to fall back on that shall enable him to save for the rainy day. The NPS launched by the PFRDA had many positives:
- Choice of 6 Fund managers & flexibility to move between them
- Choice of 4 fund options & flexibility to move between them
- Very low cost, economical way of saving for retirement
- Option of Automatic Asset Allocation based on age
- Equity Investments to be made only in Index Funds
- Fund manager can be changed only once in a year
- Only 1 switch allowed per year & that too in May only
- Extremely low on liquidity; cannot withdraw more than 20% of amount accumulated (pension wealth) before attaining 60 years of age & more than 60% after 60 years of age
- Retirement age fixed at 60 years by PFRDA might not match with individual preferences
- Taxability at the time of receipt of corpus & annuities Both the amount accumulated (towards retirement corpus) & the pension payments or annuities are likely to be taxed at the time of receipt in the hands of the pensioner. This one aspect negates all the good that could have been there in the NPS. Also the rate of taxation would be the pensioners maximum marginal rate i.e.; the rate at which he/she would be paying tax on his/her income in the year of receipt.
- Very Poor on Liquidity & Transparency While Mutual Fund Schemes are required to declare NAVs on a daily basis, the NPS is not expected to declare its NAV so frequently. The NPS investor would therefore be clueless for the better part of the year as to where he stands as regards his investment in NPS. In such a case, how can he decide whether to switch or not? Another negative is the restriction on partial or premature withdrawals. Premature withdrawals (before 60 years of age) are restricted to only 20% of the pension wealth & even after attaining 60 years the withdrawals are restricted to 60%of the corpus. One is therefore stuck with the plan.
- There are no assured returns under NPS Unlike PPF & EPF, the existing competitors, the NPS does not offer any assured returns, a must have when one is aiming to create a retirement corpus.
Conclusion Indeed a very bold & necessary step has been taken by our Govt. by launching the NPS, a much awaited, much delayed but necessary step towards providing retirement security to the common man.
Option of six Fund Managers, four investment options to choose from, very low transaction & management costs & the fact that equity money will only be invested in Index funds are the many positives of the NPS.
However, the fact that NAVs are likely to be declared less frequently & add to it the liquidity issue & the fact that the receipts would be taxed take away all the good that the NPS could have offered.
Hopefully, our FM in the forthcoming budget does away with the taxability of pension receipts from the NPS. Else, there are many better options to look out for in the form of PPF, EPF & Mutual Funds or a wise combination thereof.
So do not jump the gun right away & await a better/improved pension scheme in future (sans taxation) that also offers liquidity & transparency. To conclude, the NPS is indeed a SMALL step by the Govt. but a GIANT step for common man.
(Mr. Nirav Panchmatia is a financial planner practicing under his firm “AUM Financial Advisors”. He is a CA & MBA Finance from Narsee Monjee, Mumbai having spent last 8 years in Mumbai working in leading financial institutions like Citigroup, ICICI Bank, IRIS, etc. He can be reached on 93237 39968 or on his email: [email protected]. The above article is meant for general reading only)