Saturday, March 21, 2009

National Pension Scheme

Of late, the National Pension Scheme (NPS) is one of the most talked about topics among people of our country. The NPS is a new initiative by the government of India to help us.
Retirement is something that every person who is earning needs to plan for. Once we cross the age of 60, our earning potential goes down and we are dependent on our savings for our sustenance. So it is advisable to save some money in our retirement corpus so that we can have a comfortable old age. Unfortunately, for most of us, apart from EPF (Employee Provident Fund) we do not have any saving instrument to save for our retirement. In countries like the US we have Social Security and hence the whole burden of survival after retirement does not fall on the person. But in India we do not have such a feature.
To overcome this problem, the government of India has come up with this NPS.

What is NPS?

NPS is a retirement saving option that can be availed by all citizens of this country. This functions more or less like a ULIP. Our money would be invested in the equity markets and also the debt market. The minimum investment to begin with is Rs. 6000/- per year. The government is going to avail the services of top fund managers from SBI, UTI, Kotak, ICICI etc to manage the corpus. Our money would be saved in Individual Retirement Accounts (IRAs) People who are sure of their risk appetite can choose the type of fund they want their money to be invested in. You can choose high equity exposure or high debt exposure based on your comfort level. For people who are not sure about this can opt for the default option. The default option works in life-stage principle. During the initial phases equity exposure would be high and after 35 years of age, it goes down and debt exposure would increase. This is to provide for capital appreciation when the investor is young and capital preservation as our age goes up.

After our retirement we can withdraw a portion of our IRA corpus as a lumpsum amount and the balance must be compulsorily be invested in annuities that give us a regular monthly income.

How would the NPS Work?

This scheme will have 3 intermediaries:

1. One to collect the contribution
2. One to manage the fund
3. One to take care of the disbursement

To ensure wide distribution, the PFRDA (Pension Fund Regulatory & Development Authority) has authorized 23 players comprising of banks, mutual funds etc through which we can invest in the NPS.

What are the costs involved with NPS?
Since the NPS is floated by the government and is targeted at the common man, the costs involved are not so high. The initial joining fees is Rs. 350/- and a registration fees of Rs. 40/- Once your account is created you will get a Permanent Retirement Account Number (PRAN)

The only incremental cost is the Rs. 20/- transaction fees that has to be paid every time we make a fresh contribution to our account. Apart from this, there is also a fund management fees. This is 0.0009% of our investment which works out to Rs. 9/- per every 10 lakh invested. In contrast a normal mutual fund house would charge us as high as Rs. 22,500/- and a ULIP would cost us even more.

Benefits of investing in NPS:

The NPS has a target audience of nearly 80 million Indians who are employed and are earning. There are a number of benefits in this scheme that would make it attractive for us

1. Simple – The scheme is very simple and easy to understand for the common man
2. Scalable – This scheme has the ability to handle any number of investors
3. Portable – Can be accessed from anywhere in the country
4. Flexible – It offers us varied investment options and also withdrawal facilities. We can make annual or half yearly or even quarterly payments into our IRA
5. Low Cost – This is one of the most important and significant benefits of this scheme. This is by far the cheapest investment option.


As in every investment option, when you have benefits, there would be negatives also. There are certain aspects that we need to consider before investing in the NPS

1. Not Mandatory – This scheme is not mandatory and hence the investment is purely based on individual interest. The purpose of this scheme is to provide retirement corpus for its citizens and since it is not mandatory, it may not serve its intended purpose effectively
2. Low awareness – Though this is a great option of investing for our retirement, the awareness among our public regarding this scheme is very low. Most of our population is not aware of this scheme
3. Low Tax incentives – There are no specific tax incentives available for us to motivate us to invest in this scheme
4. Too early to judge – This is a new scheme and we do not know the kind of returns that we can expect from this scheme. Also everything is theoretical and we are yet to see it functioning.

What should we do now?

This is a new scheme and the PFRDA is expected to pass bills and amendments and activate this scheme. The scheme will be launched on April 1st and nearly 80 million Indians including you and me are eligible to invest in this scheme.
The initial investment amount is very small and we can opt to invest in this scheme with a small amount and based on the kind of performance offered by the fund managers we can opt to increase our yearly investments.

Where can we buy?
As many as 23 institutions have been approved by the PFRDA as PoPs (Points of Presence) for the NPS. All citizens other than government employees covered under the pension scheme can buy NPS through the below centers.

1. Allahabad Bank
2. Axis Bank
3. Bajaj Alliance General Insurance Co.
4. Central Bank of India
5. Citibank
6. CAMS India Pvt Ltd
7. ICICI Bank
8. IDBI Bank
9. Kotak Mahindra Bank
10. LIC of India
11. Reliance Capital
12. State Bank of India
13. Union Bank of India
14. UTI Asset Management Company etc…

Happy Investing!!!

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