scorecardresearchNPS scores over pension plans on several counts. Details here

NPS scores over pension plans on several counts. Details here

Updated: 17 Aug 2022, 12:27 PM IST
TL;DR.
You must always plan your pension early in your life. This calls for the right choice of pension plan that allows you a definite amount adequate to meet your expenses after you have retired.
In NPS, one can diversify investment across asset classes: equities, government securities, corporate debentures and alternative investment securities

In NPS, one can diversify investment across asset classes: equities, government securities, corporate debentures and alternative investment securities

So many people include pension plans in their investment portfolios hoping to secure the post-retirement phase in their lives. You can avail of the available pension plans sold by multiple pension fund houses, thus, lending you many possible options to choose from. 

Another alternative is to park a part of your earnings in the National Pension Scheme (NPS) sponsored by the Indian government. This scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA) invests your money in both equity and debt, thus, allowing you the much-needed exposure to earnings from the market apart from the inherent security in debt instruments.

Many inquire why parking money in the NPS holds more ground than other pension plans. To start with, the flexibility of investment allures many towards it. As opposed to the traditional pension plans that invest 100 per cent in government bonds and securities, NPS investors benefit from the flexibility of choosing between equity and debt depending on their financial goals and risk appetite. There is an element of trust too owing to it being backed by the government, thus, enabling people to plan and anticipate how much pension they would like post-retirement.

Suresh Sadagopan, founder, Ladder7 Financial Advisories says, “NPS schemes over time have become far more flexible and investor friendly, even in terms of taxation on what can be ultimately withdrawn (up to 60 per cent can be withdrawn tax-free at 60 years of age). Also, NPS has some of the lowest fund management charges making it a great vehicle for making a long-term investment for retirement.”

There is another benefit of investing in NPS that most are unaware of. Unlike other pension plans that give you a fixed pension after you retire and hand over the remaining accumulated amount to your nominee(s), you can choose between seeking a pension or the entire corpus. This is because there are two-tier schemes built within NPS. Both the Tier 1 and Tier 2 schemes have the same structure, charges and choice of funds. However, the PFRDA has mandated the opening of the Tier 1 account to open an NPS Tier 2 account. The minimum investments in both the accounts are 500 are 1000, respectively. 

Returns on NPS accounts

Have you ever wondered how much returns most pension plans offer or the returns that these pension fund houses earn on your money before they dole you out the pension every month? Lack of transparency is one factor that mars most pension plans of today. Compare this with NPS whose equity-based returns and earnings from government schemes are shared regularly. You just have to download the NPS mobile on your phone and check how your contributions toward various schemes are faring in terms of returns in value and percentage.

NPS returns on Tier 1 accounts

Asset ClassesOne-year Returns (in %)Five-year Returns (in %)Ten-year Returns (in %)
Equities15.33-18.81%13.11-15.72%10.45-10.86%
Corporate Bonds12.46-14.47%9.27-10.15%10.05-10.64%
Government Bonds12.95-14.26%10.29-10.88%9.57-10.05%
Alternative Assets3.98-16.73%NANA
Source: Economic Times

NPS returns on Tier 2 accounts

Asset ClassesOne-year Returns (in %)Five-year Returns (in %)Ten-year Returns (in %)
Equities15.19-17.92%13.05-15.83%10.35-10.58%
Corporate Bonds12.71-16.36%9.55-10.17%09.86-10.60%
Government Bonds12.61-13.42%10.40-12.00%9.59-10.07%
Source: Economic Times

Explaining high returns in NPS

One may wonder how NPS not only ensures a good amount of pension regularly but also helps to create the necessary corpus. The answer to this lies in the recent government’s decision to raise foreign direct investment (FDI) to 74 per cent from 49 per cent. Apart, the government also assented to the PFRDA proposal of allowing pension funds to invest in initial public offerings (IPOs) too, thus, benefiting NPS account holders in the long run.

Dev Ashish, Founder, Stable Investor says, “Risk taken in NPS depends on asset allocation chosen between E, G and C schemes. And return experience will also be similar to asset class return during the period under consideration.”

Freedom of investment

There are no fixed premiums in NPS. How much you are willing to contribute depends on how much pension you are seeking after you retire. Since the returns earned on NPS are good enough to help you create a corpus, you can decide your contributions accordingly unlike most other pension schemes that mandate you to pay a fixed amount of premium at a regular frequency. The minimum contribution you must make to NPS Tier 1 in a year is 1000 while there is no minimum contribution required for NPS Tier 2. In NPS, you can always modify your contribution amounts as long as they are more than the minimum prescribed amount limit. 

Comparison of annual premiums in various pension plans with NPS

Pension Plans Entry Age (in Years)Minimum Yearly Premium
Aditya Birla Sunlife Empower Pension Plan25-70 years 18,000
Bajaj Life-Long Goal Pension Scheme18-65 years 60,000
Pramerica Life Golden Age Plus18-50 years  10,800
Edelweiss Tokio Life -Wealth Ultima18-55 years 48,000
Exide Life Golden years Retirement Plan18-65 years 24,000
Future Generali - Big Dreams Pension Scheme18-75 years 60,000
HDFC Life Click 2 Retire18-65 years 24,000
ICICI Pru Easy Retire Pension Scheme35-70 years 48,000
Source: Policy Bazaar

Choice of fund manager

Does your pension plan company allow you to decide who will manage your money? NPS does that by allowing you to choose between different fund managers. Deepali Sen, founder partner, Srujan Financial Services LLP (a Mutual Fund Distributor) says, “While the NPS rules allow subscribers to have different pension fund managers for their Tier 1 and Tier 2 accounts, the rules do not permit them to choose from different fund managers in the same tier. So it is best to compare their (fund managers) historical performance for the last eight years plus over the investor choice (aggressive, moderate conservative and super safe). Also, after evaluating it do remember that over a longer period of track record the winners can rotate.”

This means that you get to decide where your money goes and who invests your money according to the asset allocation you have prescribed in the scheme. Moreover, you do not have to stick to the same fund manager in case of non-performance. Depending on how you wish to structure your investment portfolio, you can opt for the change in NPS schemes four times in a financial year while you can seek a change of your fund manager once every year.

Following is the list of seven pension fund managers who manage investments by NPS subscribers.

  • Aditya Birla Sun Life Pension Management
  • HDFC Pension Management
  • ICICI Prudential Pension Fund Management
  • Kotak Mahindra Pension Fund
  • LIC Pension Fund
  • SBI Pension Fund
  • UTI Retirement Solutions
  • DSP Fund House

This is a feature that benefits investors in all age groups. For example, young investors may have a risk-taking approach while those aged above 50 years may have a more conservative approach towards their investments.

Minimum assured returns scheme in the offing

The PFRDA is mulling over introducing a minimum return scheme under the NPS scheme by the end of September this year. Slated to be launched on September 30, 2022, Supratim Bandyopadhyay, Chairperson, PFRDA says, “The Minimum Assured Return Scheme is under development. Tentatively, we may start from September 30. Over a 13-year period, we have given a compounded annual growth of more than 10-10.27 per cent to be precise. Always, we have given investors inflation-protected returns.”

Now, what happens when this scheme would come into effect? When it comes to retirement planning, many people do not wish to squander their money over market tumultuous movements. In a bid to protect their contributions and earn returns that beat inflation, many investors would be flocking over to this scheme that guarantees them returns along with the peace of mind. With the subscriber limit being more in number every year, the maximum joining age has been moved to 70 years while the new exit age would be now 75 years. However, the NPS account holders can also opt for a premature exit after five years of joining the NPS scheme.

Tax benefits

It is a common behaviour among Indians to choose investments that allow scope for income tax benefits too. Under the Income Tax Act 1961, the contributions of up to 1.5 lakh made towards a pension plan under Section 80CCC provide tax deductions. Now compare this with NPS which avails you of tax benefits up to 2 lakh under different sections. However, the pension you receive under the annuity scheme is taxable like the regular pensions received from other pension plans. However, the lump sum amount is not subject to tax. You can either enjoy the amount received or re-invest it for added returns or in a bid to create a legacy.

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First Published: 16 Aug 2022, 10:53 AM IST