NPS: Retirement planners have become increasingly interested in the National Pension System (NPS). This scheme is low-cost and offers subscribers greater equity exposure compared to traditional pension products. Many investors are now choosing NPS over SIPs for long-term investments. The question is, how much pension can you expect to receive from NPS if you contribute a fixed amount to NPS each month?
The advantage of starting investing early
More important than how much you invest in NPS is when you start investing. NPS is a long-term investment, allowing your investments to benefit from the power of compounding. Investing in NPS at age 30, 40, or 50 can result in significant differences in pension amounts. Starting investments late not only reduces your retirement fund but also reduces your monthly pension amount by half.
Suppose you start investing at age 30 and your monthly investment is Rs 100,000. We assume an annual return of 10%. Over 30 years, you invest a total of Rs 3.6 crore. This will increase your wealth to ₹20.69 crore by the time you turn 60. This calculation assumes 75% of your investment in stocks and the remaining 25% in government securities. You will receive 60% of your money in lump sum upon retirement. Consequently, you will receive Rs 12.41 crore in lump sum, which will not be taxed.
Higher pension for early start
You’ll need to purchase an annuity with the remaining 40%. At a 6% annuity rate, you’ll receive a monthly pension of approximately Rs 4.13 lakh. If we assume an annual return of 12% instead of 10%, your investment will grow to Rs 30.64 crore by the time you turn 60. This translates to a monthly pension of approximately Rs 6.12 lakh.
Lower pension for late entry
If you start investing at the age of 40, investing Rs 1 lakh per month will result in an investment of Rs 2.4 crore in 20 years. By the time you turn 60, this amount will grow to Rs 7.2 crore, giving you a monthly pension of approximately Rs 1.44 lakh. If you start at the age of 50, you will invest a total of Rs 1.2 crore over 10 years. By the time you turn 60, your investment will grow to Rs 2 crore, giving you a monthly pension of Rs 40,057.
60% of the money is lump sum and tax-free
When you turn 60, you receive a lump sum of 60% of your NPS corpus. This is tax-free. The remaining 40% is used to purchase an annuity. NPS offers several investment options for subscribers, including equity, corporate debt, government securities, and alternative investments. These options are available under Active Choice. Lifecycle-based Auto Choice allows up to 75% equity investment.