National Pension Scheme (NPS): Retirement Benefit Plan
About National Pension Scheme (NPS): An Insight
National Pension Scheme (NPS) is introduced by the Government to provide better Social Security to the Individuals post retirement and help them lead comfortable life. The National Pension Scheme (NPS) was launched on 1st January,2004 and was made mandatory for all Central Government Employees. Since 2009 the Scheme has been opened for all the citizens between 18 years to 65 years of age. The NPS is managed by Professional Fund Managers. Now even various State Governments and Corporate entities have also subscribed to the scheme for the benefit of their employees.
Pension Fund Regulatory and Development Authority (PFRDA) formed in 2003 by the Government of India to manage and regulate the Funds under the Scheme. The professional fund managers invest the contribution of the subscribers in equities, government bond and other fixed return instruments so that they can provide the Subscribers with best return on the Investment. The diversification of the contribution not only mitigates the risk but also ensures optimum wealth creation.
National Pension Scheme (Series-1): All Citizen Model
The minimum contribution for non government employees is Rs 1,000/- annually. The Central Government deducts 10% of Basic Pay, Dearness Allowance from the Employee’s salary and makes an equal contribution to the fund.
The Employee Pension Fund (EPS) has got two tiers, namely Tier 1 and Tier II.
Tier I is compulsory contribution from the Government Employees and is open to other of the citizens as well.
Tier II is only available if the Individual is already contributing in the Tier I Scheme and offers more flexibility in withdrawals but does not provide any additional benefit apart from the returns on contribution.
National Pension Scheme has got four “Asset Class” for Investment:
E Class: Investment into Equities. (Maximum up to 75% of contribution can be invested)
G Class: Investment into Government Securities. (Quantum of Investment Depending on Choice of Investor)
C Class: Investment in Fixed Return Securities. (Quantum of Investment Depending on Choice of Investor)
A Class: Investment in Mortgaged Securities and Infrastructure Units including Real Estate Investment Trusts approved by Securities Exchange Board of India (SEBI). (Maximum Investment capped at 5%.)
National Pension Scheme allows Private Sector Subscribers to chose their own allocation among the four Asset Class or opt for any one of the three Life Cycle Funds. It automatically allocates Contribution among 3 classes of Fund based on the age of the Subscriber. Subscribers have the option to switch funds once in a year.
Three Types of Life Cycle Fund
Conservative Life Cycle Fund (LC-25): It is the Conservative Fund which initially allocates 25% of the contribution to equity (E Class) upto the age of 35 years and gradually goes down to 5% at 55 years of age. The rest of the investment is allocated to Class G & C Assets.
Moderate Life Cycle Fund (LC-50): It is a Balanced Fund which initially allocates 50% of the contribution to equity (E Class) upto the age of 35 years and gradually goes down to 10% at 55 years of age. The rest of the investment is allocated to Class G & C Assets.
Aggressive Life Cycle Fund (LC-75): This fund provides the maximum exposure to Equity with 75% allocation to E Class up to the age of 35 years which gradually comes down to 15% by 55 years of age. The rest of the investment is allocated to Class G & C Assets.
Investment Management Charge is also very nominal in NPS.
WITHDRAWALS AND PENSION
The Fund cannot be withdrawn before the age of 60, however if an individual avails voluntary retirement he/she may do so. But they have to invest 80% of the return in purchasing a pension annuity from an IRDAI regulated Life Insurer and the rest can be withdrawn as lump sum.
On exit from the Scheme after 60, Individual will have to invest at least 40% of the savings to purchase a pension annuity while the rest could be withdrawn as lump sum.
If the Contributor does not withdraw from the scheme by the age 70, and the accumulated fund is less than Rs 2 lacs, then one may withdraw the entire amount to the respective bank account as full and final settlement.
On attaining the age of 70, Individual can no longer contribute in the Scheme.
The Investment in National Pension Scheme is eligible for Tax Deduction U/S 80 CCD (1B) for Rs 50,000 up and over the Deduction available U/S 80C of Rs 1,50,000/- from the Financial Year 2015-16.
Investment to NPS can be made through Bank Branches.
The return on Investment is variable but the past record shows that return on Investment is in the range of 8% to 13% which is pretty good.
OPINION ON NATIONAL PENSION SCHEME (NPS)
In my opinion, Investment in National Pension Scheme (NPS) is a viable option as it offers good returns on investment along with additional tax benefit on Investment. Furthermore, with Investment being managed by Professional Fund Managers it is bound to do well in future. National Pension Scheme (NPS) offers better Retirement Benefits as compared to Employees Pension Fund.
RETIREMENT PLANNING: PLAN YOUR RETIREMENT