NPS: The National Pension System (NPS) today has approximately 21 million subscribers. Its assets under management (AUM) is Rs 16 lakh crore. This number of subscribers may not be considered large in a country with a large population like India. However, over the years, the NPS regulator, the PFRD, has taken several steps to make the scheme attractive.
The cost of NPS is very low
The National Pension System is the lowest-cost retirement plan. Its annual expense ratio for Tier 1 equity options is around 10 basis points. The minimum annual contribution is just Rs 1,000. Despite this, its total subscriber base is less than 2% of the country’s population.
Excellent track record of returns
It’s not that NPS performs poorly in terms of returns. There are 10 asset managers in the Tier 1 equity space. Their three-year annualized returns range from 12.5% to 16.5%. Six fund managers have 10-year annualized returns between 12.5% and 14.5%. These returns are considered good over the long term.
Despite this, NPS distribution volume growth remains sluggish. Despite low commissions, some drawbacks, such as low liquidity, hinder its growth. Upon retirement, 40% of the total NPS deposit must be used to purchase an annuity. This also discourages many people from taking this plan. A major drawback is that while 60% of lump-sum withdrawals are tax-free, income from annuities is taxable.
Competition with mutual fund schemes
NPS competes with mutual fund schemes. Mutual funds outperform NPS in terms of liquidity, flexibility, and tax effectiveness. Investors can use systematic withdrawal plans to offset losses of active income, depending on their needs. However, NPS outperforms them in terms of cost. Its annual expense is lower than that of mutual fund schemes.
Now most of the shortcomings of the plan have been removed
Some important changes made recently have increased the attractiveness of NPS. First, there is no longer a need to wait until the age of 60 to exit. Subscribers can exit NPS after 15 years. If you have up to Rs 8 lakh deposited in your NPS fund, you can withdraw the entire amount. Earlier, this limit was Rs 2 lakh. If your corpus is more than Rs 12 lakh, you can withdraw 80 percent of the money. Earlier, 60 percent withdrawal was allowed. Now, the remaining 20 percent will have to be used to purchase an annuity.
Now, subscribers can remain invested in NPS until the age of 85. Previously, the limit was 75 years. This means you can begin withdrawing funds from NPS after 10 years. This gives your money more time to grow (compound). Another key feature of NPS is that it requires a minimum investment period of 15 years. A retirement plan’s returns are higher when the investment has more time to grow.