Homenew pension scheme

A glance on “New Pension Scheme is the best retirement option”

The Indian population is greying. According to the latest UNFPA report, the percentage of Indians above 60 years is projected to rise to 55% by 2050. The demographics also indicate an increasing longevity owing to betterment in medical facilities. While this is good news, it also means that tomorrow’s retirees will have a longer retirement and must, therefore, accumulate a bigger corpus.
Retirement planning involves disciplined saving, vigilant investment to build a sufficient retirement corpus and its judicious drawdown in the postretirement phase. The National Pension System (NPS), launched by the Pension Fund Regulatory & Development Authority, takes all these concerns into account. It is a sophisticated innovation based on the world’s best practices in the pension sector.
While saving for a long-term goal such as retirement, the cost matters a lot. Over 35-40 years, the charges can shave off a significant amount from the corpus. The NPS charges fund management fees of 0.0102% for the government employees and there’s a ceiling of 0.25% for the private sector. This is perhaps the lowest in the world. Other charges are also low, making the cost-adjusted returns of the NPS quite attractive. It is estimated that the total cost of the NPS, including the fund management fee, will not exceed 0.5% per year, making it the cheapest financial product in India.

The NPS is a well-regulated, transparent and flexible scheme. It has laid down prudent investing norms for fund managers, and their performance and portfolios are regularly monitored by the NPS Trust under the overall supervision of the PFRDA. The scheme offers complete flexibility. The investor decides the percentage of the corpus that goes into equity, corporate bonds and government securities. There is only a 50% cap on exposure to equity.
One of the most outstanding features of the NPS is the ‘lifecycle fund. It is meant for those who are not financially aware. It is also the default option for someone who has not indicated his desired allocation. Under this option, the investor’s age decides the equity exposure. The 50% allocation to equity is reduced every year by 2% after the investor turns 35, till it comes down to 10%. This is in keeping with the strategy to opt for a higher-risk , higher-return portfolio mix earlier in life. As the investor approaches retirement , he shifts to a more stable, low-risk portfolio.
This automatic rejigging of the allocation is a unique feature of the NPS. No other pension plan or mutual fund offers such a facility to investors. There are a few funds based on age, but they are one-size-fits-all solutions, not customised to the individual’s age.
Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2). Under this section, if an employer contributes 10% of the salary (basic salary plus dearness allowance) to the NPS account of the employee, this amount gets tax exemption. This is over and above the 1 lakh tax deduction under Section 80C. It’s a win-win situation for both because the employer also gets tax benefit under Section 36 I (IV) A for his contribution. By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by simply restructuring the salary at no extra cost.
The NPS allows one to accumulate the corpus from the age of 18 for 40-odd years. There is minimal leakage in the form of withdrawals for competing consumption expenses. This allows the investor to reap the benefits of compounding till he turns 60.
The NPS also offers the flexibility to draw up to 60% of the retirement corpus as a lump sum to meet financial life goals like children’s marriages, housing, or draw down the lump sum in a staggered manner till one is 70 years old. The rest can be used to buy an annuity from any of the seven Irda regulated annuity service providers.

The author is the Chairman of the Pension Fund Regulatory and Development Authority.

Source: Times of india
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  • Anonymous 10 years ago

    Writer have no idea about old pension scheme benefits and disadvantages of new pension scheme. He just making jokes and building castle in the air.

  • pankaj verma 10 years ago

    old pension is far much better. in the old pension scheme we have not to invest a single paise. we were able to withdraw from GPF. even returns on NPS are very low, not more than 5-6% which adjusted for high inflation turns negative. further there is no peridical revision of DA, no affect of pay commission. Is the writer dong joke?
    Employee pension scheme is far mush better wherein 24% is contributed, 12% from employee side and 12% from employer.

  • D K Verma 10 years ago

    Most of the money needed during service and no withdrawal allowed will put an employee in financial hardship. Building home, children education and marriage take place before 60 years of age. What happened if corpus not grow at a significant rate. Old pension shceme is far better. It grows when rate of DA grows and in the case of pay revision.

  • Children's marriages will not be after retirement, but in the age of 40-50. then whats the need of this scheme. after if any employee wants to build home, for hospital expenses not giving even single rupee. worst NPS, Old pension system is 200% better than this.