Saatth ke Baad Karoge Thaath!
Everyone can retire happily now.
Just add Rs 100/- per month in your NPS Swavalamban account and get contribution of Rs 1000/- per year from government. Visit www.pfrda.org.in or call at 1800 110 708 for more details.
More Indian PSU are joining to provide NPS to their employees.
Q: The National Pension System (NPS) is fetching near double-digit returns, which is at least a percentage point higher than what Employees’ Provident Fund (EPF) or Public Provident Fund (PPF) offer. Will this trend continue and is it a one year wonder because of the stock market is doing well. How should investors approach the NPS vis-à-vis PPF and EPF?
A: I think NPS is going in a great direction; it is the right direction in which it is going. However, still early days for NPS. They are building their track record in terms of fund management. The basic unique selling point (USP), which NPS provides vis-à-vis other investment options — accumulation stage of retirement fund, cost of fund management is very low and one do not have that option of accessing that kind of cost anywhere else and those are the advantages, which is reflecting in the performance of underlying NPS. However, when comes the question of comparing EPF, PPF with NPS, it is no-brainer as of now.
Go in for PPF and EPF but keep a watch on NPS and environment will become much clearer in terms of action once the new tax regime, which has been talked about comes out in which the exempt-exempt-tax regime, which one has been looking forward to, comes then the situation becomes slightly different. However, as of now it’s in favour of EPF, PPF but keep a watch on NPS.
Q: Should you compare the NPS to some of the mutual funds because that is where the tax treatment seems to be more aligned?
A: That is right; NPS should be compared with mutual funds because money is being managed by some of the same fund managers under the asset management company structure itself. As I mentioned earlier, the cost is one big advantage in favour of NPS. The cost being paid is very low, it is one of the lowest cost of managing retirement point in the world is in India and that is they have done very well.
One more thing, which one need to keep a watch on is the pension bill. It needs to get approved in the parliament because Pensions Fund Regulatory and Development Authority (PFRDA) getting a statutory status will pickup pension industry in terms of product development in times of companies coming in with specific product. However, as a starting point NPS is good compared to mutual fund but what one does not get in NPS is intermediation available; there are very few advisors or planners who are able to advice that.
Q: If you have to advice someone on asset allocation for retirement, would NPS have a place?
A: No. I will still wait for some more time because for me it is still early stages and the biggest challenge in NPS is servicing. The client servicing is a big challenge. They are still not clear how to do it because the intermediation costs are not built into that.
Caller Q: I have invested in three ULIP schemes, should I switch to mutual funds?
A: I would say that always buy insurance do not invest in insurance and if you have to invest, invest in mutual funds or other investment products. Insurance is an expense and investment has to be in non-insurance product over a longer period of time. In this current scenario because you have been paying premium for four year, you have to evaluate each and every policy and see the impact on the surrender value. There is no point incurring cost, there is no point incurring losses at this point of time.
If the losses are high or the surrender charges are very high then our advice is be to stay Put, do not redeem, do not stop, go on for two-three-four year more cycle, make sure you are able to take decent returns out of the policy and then switch. Having said that the basic thumb rule, which we always advice people is investing in mutual fund for long-term is much better, much less costly than investing in long-term for insurance provided you understand.
“Only 4,000 of the 50,000 bank branches in the country are selling NPS, as many banks are reluctant to distribute the product. They account for just eight per cent of the branches,” said Yogesh Agarwal, chairman of Pension Fund Regulatory and Development Authority (PFRDA), which manages pension fund under NPS, on Saturday.
Envisaging that investors in insurance and mutual fund products for securing the post-retirement would eventually shift to NPS, Agarwal added, “The fund has been giving about 30 per cent more return than the existing insurance and mutual fund schemes. NPS is giving return of 12-14 per cent.”
The contributory NPS was launched by the Centre for its employees in January 2004, instead of the government assuring pension for its employees. In May 2009, it was extended to other people in the age bracket of 18-55 years. However, investor has to choose the investment options available, which is a difficult task even for seasoned investors.
“Though both public and private sector banks can participate in the scheme, many banks are not coming forward,” PFRDA chief said. “Due to poor distribution and very low commission, NPS did not make much inroads into nongovernment pension segment,” he added.
NPS has around 20 lakh members, including around 6 lakh corporate accounts, 12 lakh Central government employees and six lakh of state government ones. Still, it has a small corpus small at around Rs 9,000 crore.
About 27 out of 30 states have joined the scheme. “States of West Bengal, Tripura and Kerala have not joined the scheme citing ideological differences,” Agarwal said. As a part of financial inclusion programme, the Centre also launched a rural pension scheme – NPS Swavalamban in September 2010, with a 1,000 annual contribution from the Centre.
The National Pension Scheme (NPS) has made several changes in its various operational parameters in recent times, but there is one significant change that needs attention of all investors. This relates to the manner in which withdrawals can be made from the scheme once the pension age has been reached. The new norms will make it easier for individuals to actually ensure that they are able to get the required amount of money in the manner in which they see fit rather than being forced to follow the conditions laid out in the scheme. Here is a look at the change that will now be visible.
Current situation: There are two phases in the entire process of pension for individuals. The first stage, which is important for wealth accumulation point of view, deals with investments that will be made in the scheme. This can take place over a number of years and the goal of investors should be to contribute as much as possible so that a higher amount is available in the latter years. The other stage comes at the time of reaching the age for receiving pension. When a person turns 60, it is mandatory to use 40 per cent of the accumulated amount to generate pension, while the remaining amount can be withdrawn.
With respect to the remaining 60 per cent of the accumulated amount that is present in the account, investors can choose the phased withdrawal system, whereby, they can choose a certain percentage that they would withdraw each year including the year in which they are exiting the system. This is often found to be a problem for several people who have need for funds at a specific point of time and with the phased withdrawal undertaken, the needs and the flow of fund might not match. This is the reason that there have been lots of representations to the pension authorities regarding this issue.
Change: There has been a change initiated with respect to withdrawals following the representations made on the issue. There will now be an option for subscribers to defer, or time, the entire lumpsum withdrawal as per their convenience. The new system would be called the deferred withdrawal system. Under this system, there is the ability to take the entire 60 per cent of the withdrawal at a single point of time. The other factor is that investors can decide the time period. So, this could be right at the time of reaching the pension age or later. This will help a lot of people who actually need funds at the time of their retirement for a specific purpose and they will be able to take the money to the extent allowed as per the workings of the scheme.
Responsibility: The availability of the route of withdrawal also means an additional bit of work as far as individuals are concerned. Since they have the responsibility of making the required decision on their own, this will require an element of homework on their part. It has to be noted that they can defer the withdrawal only up to a period of 70 years of age and take it at any time before they reach this age. Meanwhile, no new contributions will be possible. If there is no intimation given till the time they reach 70, then the amount would be redeemed at that specific point of time.
Investors now have to make the decision in advance and they have to go about the process by looking ahead and then planning for this particular situation.
(The writer is a CA and certified financial planner)