NPS: While awareness about retirement planning is growing in India, statistics show that a significant portion of the population remains unreached. The National Pension System (NPS), one of the country’s most prominent retirement schemes, currently has approximately 21 million subscribers and an asset under management (AUM) of over Rs 16 lakh crore.
However, considering India’s vast population, this number represents less than 2%. To address this gap and make the scheme more beneficial to the general public, the Pension Fund Regulatory and Development Authority (PFRDA) has made some significant changes to the rules that directly impact your pocketbook and future.
Investors often ask, why NPS ? The biggest answer is its extremely low cost. NPS is considered the most affordable retirement plan in the country. Its annual expense ratio for Tier-1 equity options is just around 10 basis points, which is negligible compared to any other financial instrument. You can start investing with an annual contribution of just Rs 1,000.
Not only is it cheap, it also has an excellent track record in terms of returns. Data shows that the 10 asset managers in Tier-1 equity have delivered annualized returns ranging from 12.5% to 16.5% over the past three years. However, over the long term (10 years), returns have ranged from 12.5% to 14.5%, which is considered excellent for wealth creation.
Where did NPS lag behind mutual funds?
Despite these strengths, NPS growth has been sluggish. The main reason for this was its strict liquidity requirements. Investors often compare it to mutual funds, which offer easy withdrawals and Systematic Withdrawal Plans (SWPs). The biggest hurdle with NPS was the mandatory requirement to invest 40% of the total deposit amount upon maturity to purchase an annuity (pension plan).
Another problem is that 60% of the lump sum withdrawal is tax-free, but the regular pension received from an annuity is taxable. This was the reason why people were hesitant to lock up their hard-earned money, but now the regulator has taken concrete steps to address these concerns.
Recent changes have transformed the NPS. Investors are no longer required to wait until age 60 to withdraw funds. According to the new rules, subscribers can exit the scheme even after 15 years of investment. This relief is even greater for small investors. If your NPS fund balance is up to Rs 8 lakh, you can withdraw the entire amount without purchasing an annuity. Previously, this limit was only Rs 2 lakh.
Additionally, if your corpus exceeds Rs 12 lakh, you can now withdraw 80% of your funds in one lump sum and invest only 20% in annuities. Previously, only 60% withdrawal was permitted. This change could prove to be a game-changer for those who want a large sum of money after retirement.
In another visionary decision, the PFRD has increased the maximum age limit for remaining invested in NPS from 75 to 85 years. This essentially means you have an additional 10 years to compound your money (earn interest on interest). The fundamental principle of retirement planning is that the more time your money has to grow, the higher the returns. NPS mandates a minimum investment period of 15 years, which ensures that your money can weather market fluctuations and build a substantial corpus over the long term.