NPS Retirement Plan: The National Pension System (NPS) is rapidly gaining popularity among people planning for retirement. A major reason for this is its low cost. Additionally, it offers the opportunity to invest more in the stock market compared to traditional pension plans. This is why many investors are now considering NPS a better option than SIPs for the long term. Therefore, it’s important to know how much pension you can receive after retirement if you invest a fixed amount in NPS every month.
Why Starting Early is Important
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The amount invested in NPS is important, but even more crucial is when the investment is started. NPS is a long-term scheme that benefits from compounding. If a person starts investing at the age of 30, 40, or 50, there is a significant difference in the pension received at retirement. Starting late not only results in a smaller retirement fund but also significantly reduces the monthly pension.
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The Impact of Compounding Over the Long Term
Let’s say a person invests ₹1 lakh every month in NPS starting at the age of 30. Assuming an average annual return of 10%, the total investment over 30 years would be ₹3.6 crore. By the age of 60, this amount could grow to approximately ₹20.69 crore.
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This estimate assumes that 75% of the investment is in equity and 25% in government securities. At the time of retirement, according to the rules, you receive 60% of the total fund as a lump sum, which is completely tax-free. This means you could receive approximately ₹12.41 crore as a lump sum.
More Pension with an Early Start
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The remaining 40% of the fund is used to purchase an annuity. If the annuity rate is 6%, this could provide a monthly pension of approximately ₹4.13 lakh. If we assume that the annual return is 12% instead of 10%, the total fund at the age of 60 could be approximately ₹30.64 crore. In this case, the monthly pension could increase to about ₹6.12 lakh.
The disadvantage of starting investments late
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If a person starts investing ₹1 lakh every month at the age of 40, their total investment over 20 years will be ₹2.4 crore. This amount could grow to approximately ₹7.2 crore by the age of 60. This would result in an estimated pension of about ₹1.44 lakh per month.
However, if the investment is started at the age of 50, the total investment over 10 years will be ₹1.2 crore. This amount could reach approximately ₹2 crore by the age of 60, resulting in a monthly pension of only about ₹40,000.
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60% of the amount is tax-free
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In the NPS, 60% of the accumulated fund is received as a lump sum and is tax-free upon reaching the age of 60. It is mandatory to purchase an annuity with the remaining 40%.
There are several investment options available in this scheme, such as equity, corporate debt, government securities, and alternative investments. These options are available under the Active Choice. In the Life Cycle-based Auto Choice, the investment is automatically adjusted according to age, with equity investments potentially reaching up to 75%.