New Pension System(NPS) – Part 2

When it looked nice to see Pension scheme guidelines from investment point of view, there seems to be unanswered questions for me with respect to withdrawal and let us discuss the pros and cons of NPS vs EPFO.

What would be the penalty in case I am unable to contribute the minimum annual contribution?
You would have to bear a default penalty of Rs.100 per year of default and the account would become dormant. In order to re-activate the account, pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.

How will the subscribers get the money back?

  • The subscriber’s  contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The current guidelines do not permit a pre-mature withdrawal or any loan against the investment in NPS.
  • The account would be closed under following circumstances: death, account value reduces to zero and change in citizenship status.  If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
  • A person who exits NPS, before attaining the age of 60 years, s/he may withdraw 20% of the corpus and invest the rest in annuities offered by insurance companies.
  • A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and the rest of the money can be withdrawn in one go or in instalments.
  • A person who does not exit NPS and on attaining 70 years, his/her account would be closed with the benefits transferred to him/her.
  • One shall have an option of selecting an annuity which will pay a survivor pension to your spouse.

Some unanswered questions and my thoughts  Can someone help me? Did I get some thing wrong?

  • What happens once I cross 70 years? Is NPS of no use to me? 
  • Today we use  people work actively till age of 65 years and I am sure this is going to increase after another 32 years when I would become 65 years old . Is pension scheme only for 5 years of retirement? Confusing!!

It is said that IT industry is considering moving the retirement money of its 2-million workforce from the Employees’ Provident Fund Organisation (EPFO) to the New Pension Scheme.The ballpark estimates show more than Rs 1,300 crore could move into NPS from the IT sector. What should IT industry do?

  • NPS also provides access to online checking of account balances and makes the system transparent compared to the delayed annual contribution slips EPFO sends
  • if you are interested to take risks with your retirement money, you can take risks with more exposure to equities directly or though mutual funds. Can I not do this with mutual funds itself? why we need NPS?  NPS is no way safe like EPFO and there is no guarantee of the principal and returns and in addition there is more cost cost involved compared to EPFO.
  • Would it not make sense to continue doing my EPFO investments and NPS investments so that I have more money on retirement.