New Pension System (NPS)

In India, people who work in the government and railways receive pension after their retirement and this pension corpus is contributed by employee and the government/railways/nationalized banks. If you work for a public or private sector employee, there was no pension. You need to save money for your retirement , when you are employed. Else after you retire you depend on your children to support you though death. What happens if the children do not care for the parents. Even people who have save money during their employment have tough times with rise in cost of living and huge  medical expenses.

What happens in a Country like USA?They have a concept called Social Security. You need to pay Social Security taxes in addition to the other taxes on your income and when one reach the retirement age at 62 years, You would be eligible to received benefits.The amount of benefit depends on the age at which a worker chooses to retire. You can find more about this at Social Security Online.

There is good news!. New Pension Scheme has been launched for public  in India last week. While the scheme is already operational for central govt employees, its opening for general public on May 1, 2009.This is the government-regulated pension plan, on the lines of the ‘401K-retirement plan’ in the US. The returns from NPS is market driven or market determined.

I am trying to have two blogs on NPS, Part 1 talks of where and how to invest and what happens to the invested money(continued here) and Part 2 talks what happens after 60 and withdrawl procedures an how IT companies are viewing at New Pension scheme.

Who are eligible to sign for the New Pension Scheme?
people aged between 18 years and 55 years

Who shall be responsible for protecting my interests as a NPS subscriber?
The Pension Fund Regulatory and Development Authority, the regulator, will protect your interest.

What is the allowed contribution to NPS? 

  • Minimum annual contribution is Rs.6,000 and the minimum amount per contribution is Rs 500.
  • The minimum number of installments per year is four.
  • There is no upper limit on the contribution per installment or on the number of installments.

Who shall manage the contribution?

  • The fund will be managed by six fund managers, appointed by the government at annual fees of 0.0009% of the invested amount, which is less than one paisa per Rs 100.
  • The fund managers appointed by the PFRDA are SBI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC MF and Kotak Mahindra.
  • Today, You have the option to select only one fund. However, the regulator may allow the subscribers to choose more than one fund in future.

Where will the contribution be invested?

  • The money invested can be invested in three areas namely equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits and it is for the investor to decide how much should be invested in each of these.
  • There some constraints on the investments in equity.First, investment in equity cannot be more than 50% of the amount in investor’s account. Secondly, fund managers cannot invest in shares of individual firms, but only in index funds linked to the BSE’s sensex or the NSE’s Nifty.
  • If you do not want to make a choice among these three, there is ‘auto choice’ option. Under this option, for those aged 18-36 , 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55.

Where should I go to  sign up for NPS?

  • Investors can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks including SBI ,ICICI and Citibank and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another.
  • All investors would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs). The investor’s account will be kept by a record keeping agency appointed by the PFRDA,just like a depository maintains demat accounts for shares.
  • The investor will need to interact only with the POP, where he can deposit his annual /monthly contribution. The investor can can decide the fund manager and also instruct his POP to shift from one fund manager to another.

Is NPS just another mutual fund scheme?

  • A Mutual Fund investor can enter and exit an scheme at free will, NPS will bind them till the retirement age of 58 years. The current guidelines do not permit a pre-mature withdrawal or any loan against the investment in NPS.
  • NPS distinguishes from an MF scheme in terms of its cost structure.NPS carries a bare minimum fee of 0.0009%, which is very low compared to mutual funds(entry load of 2.25% and charge of 1.5%).

What is the cost involved with contribution to NPS?

  • POPs will also charge an investor an account opening fee of Rs 20 and an additional charge of Rs 20 per transaction.
  • Though NPS distinguishes from an MF scheme in terms of its cost structure, but there is no free lunch. Each investor will thus be required to pay NSDL an account opening charge of Rs 50. Besides, there will be a maintenance charge of Rs 350 per year and an additional charge of Rs 10 per transaction.

Given the current cost structure, NPS appears to be more beneficial to those with a higher amount of periodic investment. In case of MF scheme, the higher the investment, the higher would be the charges.

What are the tax benefits with NPS?
As of today, NPS does not enjoy any tax benefits, either at the investment stage or at the time of maturity.This makes it less attractive vis-à-vis other retirement plans available in the market . The withdrawals under the NPS attract tax under the EET (exempt-exempt-taxable) system, which means that while contributions and returns to the NPS are exempt, withdrawals attract tax. Though it is felt that there should be EEE systems for Pension scheme, internationally  pension schemes generally follow this model.