The good, the bad & the ugly of the “New Pension Scheme”
June 10, 2009
- Active choice
- Auto choice (Lifecycle Fund)
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).
- 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.
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