Although India has
the highest percentage of habitual savers (59%) (As per the survey conducted by
Aegon Insurance across 15 countries), one thing that bothers most individuals
during the golden years is the possibility of outliving their entire retirement
corpus. But this worry can be addressed by investing wisely from an early age.
Before we delve into the subject matter; here are a couple of questions for an
honest introspection:
1. Have you provided
for a pension facility? (The answer would be a "no" if you are
working for a private limited company)
2. Would you be keen
to have a pension for life if provided by a Government of India Agency? (The
answer would mostly be a "yes")
The investment
avenue that we are talking about here is the "National Pension System
(NPS)" offered by the Pension Fund Regulatory and Development Authority
(PFRDA).. Over the years, subscriptions have jumped from 4 lakh in March 2009
to 123 lakh in March 2016.
If you are wondering how it works, here's a snapshot and it's features:
1. NPS is a voluntary
defined contribution scheme (i.e. the pension you receive depends on the
retirement corpus accumulated over the years)
2. The investments are
pooled together and managed by professional fund managers appointed by PFRDA
3. You have the
flexibility of deciding the portfolio you wish to invest in (bonds, bills,
corporate debentures, and shares)
4. At the time of
normal exit from NPS, you would be required to mandatorily purchase a life
annuity from a PFRDA empanelled life insurer.
5. A citizen of India
(whether a resident or a non-resident) can participate in the NPS-All Citizen
Model
The All Citizen Model (Unorganised Sector-UoS)
offers two investment accounts—Tier I and Tier II with varied features:
1. Tier I Account: It is a
non-withdrawal account, which means the applicant isn't allowed to withdraw the
contributions he has made. The objective of the account is to build a
retirement corpus. The good news is an applicant is eligible to claim tax
benefits on their contributions. The minimum amount to be contributed every
year is Rs 6,000 (excluding charges and taxes) and can be made in multiples of
Rs 500. If the applicant fails to contribute Rs 6,000 in a year, then his
account would be frozen till the shortfall along with penalty isn't paid (Rs
100 per year of default)
2. Tier II Account: This is a
voluntary savings account and isn't linked to retirement. An applicant is free
to withdraw from this account as per his requirement but isn't eligible to
claim tax benefits on the contributions made. The minimum amount to be
maintained is Rs 2,000 per year
NPS offers an applicant freedom to decide how
his money will be invested. It offers two options—Active Choice and Auto Choice
For applicants
investing in Active Choice, the entire pension wealth can be invested in Asset
Class C or G and up to a maximum of 50% in equity (i.e. Asset Class E). While
those investors lacking knowledge to manage their NPS investment can opt for
Auto Choice (i.e. Lifecycle Fund). Here, the fraction of funds invested across
three asset classes will be determined by a pre-defined portfolio.
The NPS offers
3 options for a subscriber to exit/withdraw the corpus as explained below:
1. Before attaining 60
years: At least 80% of the accumulated corpus needs to be mandatorily
used to purchase a life annuity and the balance 20% is paid in lump sum
2. Upon attaining 60
years: At least 40% of the accumulated corpus needs to be mandatorily
used to purchase a life annuity and the balance 60% is paid in lump sum. 40% of
the accumulated retirement corpus is made tax free at the time of retirement as
per the Union Budget of 2016 – 17. However, the subscriber has the option to
defer the lump sum withdrawal till the age of 70 years.
3. Death of the
subscriber: The entire accumulated corpus (i.e. 100%) would be paid to the
nominee or legal heir. There will not be any purchase of annuity and the entire
proceeds received will be tax free in the hands of the nominee/legal heir as
the Union Budget of 2016 – 17.
Some key developments:
1. Over the years the asset under
management (AUM) of NPS has grown from Rs 2,277 Crore as on March 2009 to Rs
1,18,810 Crore as on March 2016
2. Moreover, Pension Fund Managers (PFMs(Source:PFRDA)) have clocked encouraging returns
over the period
However, out of Rs
1,18,810 Crore AUM (as on March 2016), only Rs 1,333.16 Crore was the AUM under
Tier I & Rs 192.84 Crore under Tier II for the All Citizen Model. This
highlights couple of inefficiencies of this model to attract the common man:
1. Inefficient
Taxation: NPS does not enjoy the Exempt-Exempt-Exempt status unlike
Employees Provident Fund (EPF) and Public Provident Fund (PPF). As per the
current tax laws, 60% of the accumulated retirement corpus will be brought
under the tax ambit, making it unpopular vis-Ã -vis PPF. Moreover, the life
annuity that a subscriber has to mandatorily purchase from the retirement
corpus is also taxable as per the prevailing tax laws.
2. Inability to beat
inflation: A subscriber to the NPS is forced to buy a life annuity from a
life insurance company. Annuities offer paltry returns (in the range of 3% to
7% pre-tax) making it an incompetent instrument to beat inflation.
However, in the bid to attract more subscribers and embrace technology;
PFRDA has taken some key initiatives:
1. Mobile App: Mobile App for NPS
is now available to the subscribers in "Google Play Store" as
"NPS by NSDL e-Gov". By using the app, one can:
a. Transaction
Statement: Raise request for transaction statement for a particular financial
year.
b. Account details: View NPS account
details
c. Statement of
holding view: Details of scheme wise units along with latest NAV and the total
value of the schemes (as on date) is available.
d. View of last 5
contributions: Details of the last five contributions credited will be available
i.e. credit date, tier type, amount and contribution remarks.
e. Change in contact
details (Telephone/Mobile no /email ID): At present, subscriber can change his/her
contact details in CRA system using login credential. The same feature has been
extended in Mobile App.
f.
Change password/Security question: Subscriber can add
/ modify his / her password and set security question (for password reset)
through Mobile App. Subscriber will also be able to reset his/her password by
answering secret questions.
g. Notifications: Notifications, if
any, from CRA will be available to the Subscriber. Short messages will be
displayed here.
2. Change of address
using Aadhaar authentication: The subscribers can now update/modify their
address using Aadhaar based authentication. The subscriber will also be
permitted to add their permanent as well as correspondence address
3. Scheme Preference
change facility: The NPS Subscribers associated with All Citizens of India (UoS),
Corporate sector and Government sector (for Tier II only) can now change their
Scheme Preference by logging in. An OTP will be generated on the registered
mobile number and after confirmation, the subscriber can change the Pension
Fund Manager (PFM), Asset Class, Allocation Ratio and Scheme Options
4. Tier II activation
through eNPS: Any subscriber having a Tier I account in NPS can now activate a
Tier II account online through eNPS. To activate a Tier II account, the
subscriber has to enter their Permanent Retirement Account Number (PRAN), Date
of Birth (DOB), and Permanent Account Number (PAN). Once the details are
submitted, an OTP will be generated on the registered mobile number and after
confirmation; the subscriber can go ahead and activate the Tier II account.
5. KYC re-verification
using Aadhaar authentication: A subscriber whose bank has not confirmed
(rejected) his/her KYC verification request can now update their address
details and confirm KYC using Aadhaar based authentication. He can do so using
the eNPS module.
6. Facility to
contribute online: Subscribers are contributing through online mode using eNPS portal
of NPS Trust. A facility has been made available to contribute online for
subscribers using IPIN credentials in CRA system.
7. Withdrawal from
Tier II account: Till now a subscriber had to travel to the branch of the Point of
Presence (POP) or Nodal Office mapped to his account. This caused a lot of
inconvenience to the subscriber. Taking cue, PFRDA has come up with a facility
wherein the subscriber can withdraw from his Tier II account using his login
credentials and authenticating the OTP generated on his registered mobile
number.
8. Online IPIN
generation: This facility will help a subscriber access his NPS account
immediately without waiting for a physical I-PIN to be dispatched in the post:
To Conclude…
As Financial Planners with over a decade of experience, we believe this product
does not hold enough promise to create a substantial corpus that will meet your
retirement need citing its inability to beat inflation and inefficiency to save
taxes.
Even if a subscriber decides to apply for one, it won't be prudent to be
completely dependent on this single instrument as one plan for the golden
years.
Rather, if you chalk-out a prudent financial plan with the help of a financial
planner, and invest wisely as per the plan laid out (which would mostly
recommend you equity allocation at younger age, and then as your age progresses
balance the asset allocation between equity and debt instruments), then the
corpus that you create will be substantial enough to meet your retirements
needs.
Whets the things you should know that could make your retirement
corpus bigger?
Live the life you truly deserve
Courtesy
This
article has been authored by PersonalFN, a Mumbai based Financial Planning and
Mutual Fund research firm known for offering unbiased and honest opinion on
investing.
