NPS New Rules: Future security and a stable income after retirement are every working person’s dreams. However, rising inflation makes this dream unfulfilled. Addressing this challenge, the Pension Fund Regulatory and Development Authority (PFRDA) has proposed a major overhaul of the National Pension System (NPS). Its objective is to transform the NPS from a mere investment plan to a guaranteed pension system, ensuring a guaranteed and secure pension after retirement.
Current NPS System
The National Pension System was launched in 2004 for government employees and opened to all citizens in 2009. While the NPS has gained popularity for its flexibility and tax savings, its biggest drawback is that it offers no guaranteed pension.
Under the current system, your investments are invested in the stock market, bonds, and government securities. Upon retirement, the investor receives a lump sum, while the remaining amount is used to purchase an annuity, which provides a pension. However, the amount of this pension depends on market fluctuations, which can result in an unstable income after retirement.
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Flexibility Makes It Special
In its consultation paper, the PFRDA has introduced the first model as “Flexible Growth.” This model is for investors who seek a balance between risk and stability. It combines both a Systematic Withdrawal Plan and an annuity.
In this model, the pension amount will not be fixed; however, investors will be able to estimate their potential pension based on a predetermined formula. Contributions for at least 20 years will be mandatory. By the age of 45, 50% of the fund will be invested in equities and the remaining in bonds, to maintain a balance between risk and return.
Upon retirement, the investor will receive 4.5% of the annuity fund every month through SWP, which will increase by 0.25% every year for the next 10 years. When the investor turns 70, the remaining funds will be used to purchase an annuity for a period of 20 years, followed by a lifetime pension.
Inflation-Linked Fixed Pension
The second proposal is the biggest attraction for investors. This model is designed for those who want a stable, inflation-adjusted pension after retirement.
In this plan, the pension amount for the first year will be pre-fixed. Thereafter, the pension will increase annually according to the Consumer Price Index (CPI-IW), or inflation. This means that if inflation increases by 5%, the pension will also increase by 5%. This way, your real purchasing power will remain intact.
Under this plan, contributions for 20 years will also be mandatory. The fund will be divided into two parts—the first part will be invested in government securities and high-rated bonds, providing a guaranteed pension, while the second part will be invested in equities, allowing for inflation-adjusted pension increases.
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What will investors benefit from?
This new change will provide investors with both stability and security after retirement. Until now, the NPS was considered a market-linked scheme with no guarantee of a future pension. However, these proposed models are moving it towards becoming a “guaranteed pension scheme.”