Welcome to the new world of investing for the future.
Till now the unorganized sector did not have any pension plans, to enable them to save for the future. Why there was no social security system of savings out of salaries/trading income and even Provident fund scheme remained a distant dream for them. Going with the PPF , it is only organized and white collar employees had invested in PPF.
Many Mutual funds had floated schemes calling them as Pension plans which in effect is ELSS scheme in a way. While there had been provident fund contribution system prevalent with Government and private sector , pension is an unknown word for the private sector.
In a reform long overdue, the Pension Fund Regulatory & Development Authority (PFRDA) has finally put the NPS in motion.
NPS will meet the requirements of the private sector especially for the unorganized sector , who have no system of savings for the future.NPS is also available to Government employees. The pensions of all central government employees who have joined service after January 2004 will also be a part of the NPS. NPS is now mandatory for all government employees who have joined service after January 1, 2004.
NPS has been designed in a simple ay with the investor has to approach the Point of Presence(POP) and the National Security Depository Limited(NSDL) will be the record keeper.Six entities selected by the PFRDA will be given the task of managing funds.
The investment norms allow subscribers to invest their entire savings in government securities or corporate, state and municipal bonds, which are less risky than equities. As per the revised ‘auto choice’, half of the investments of subscribers up to an age of 35 years will go into equities, one-fifth into central and state government bonds, and the rest into corporate bonds and select other instruments, including fixed deposits. At the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
The pension fund launched by PFRDA will be invested in three kinds of assets — equity, government bonds and corporate bonds — and it is for the investor to decide how much should be invested in each of these.
Investment in equity is, however, subject to two significant caveats. First, it cannot be more than 50% of the amount in investor’s account. Secondly, fund managers cannot invest in shares of individual firms, but only in index funds linked to the BSE’s sensex or the NSE’s Nifty.
For those who would rather leave it to experts to decide what the balance should be, there is ‘auto choice’ option. Under this option, for those aged 18-36 , 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55.
Under the scheme, one can invest any amount, though tax benefits will be available only up to Rs 1 lakh under Sec 80C. The minimum annual contribution, however, has been mandated at Rs 6,000. The fund will be managed by six fund managers, appointed by the government at annual fees of 0.0009% of the invested amount, which is less than one paise per Rs 100. The fund managers appointed by the PFRDA are SBI, UTI Asset Management, ICICI Prudential Life
Insurance,Reliance Mutual Fund, IDFC Mutual Fund and Kotak Mahindra MF.
The Pension Fund Regulatory Development Authority (PFRDA) has stipulated that only half of an individual’s savings can go into equities even if he opts for a high-risk high-return investment. The auto (default) choice for persons who do not make an investment choice also
caps the equity exposure at half of the savings.
The distinguishing feature of the NPS, when compared to any other type of investment, is that it’s cost,which is one of the main attractions.
NPS has distinct characteristics wherein the investing individual will have a choice of method of savings. While PF authorities both in Government sector as well as Private sector are reluctant to invest corpus in the equity scheme (which is 1 5% for equity investments) as accountability weigh in their minds, it is now left to the choice of the individual to go in for a route which he feels good for accumulation of wealth. Negative feature of the NPS is that only contributions and returns are exempt from tax. Taxing withdrawals has put the scheme at a disadvantage
REGISTRATION PROCESS:
Eligibility: 18-55 years of age. Upon registration, the investor will receive a permanent retirement account number.
Minimum annual contribution is Rs.6,000. The minimum number of instalments per year is four. There is no upper limit on the contribution per instalment or on the number of instalments.
Two types of accounts are available under the NPS.
Tier-I account: Individuals can contribute their savings for retirement into this non-withdrawal account.
Tier II account: Under this saving facility, individuals are free to withdraw their savings whenever they require.
Tier I account is available for contribution from May 1, 2009. The commencement of the Tier II account will be notified shortly by PFRDA.
The account would be closed under following circumstances: death, account value reduces to zero and change in citizenship status. One can exit before attaining the age of 60 years,provided atleast 80 percent of pension corpus is annuitized.
On attaining 70 years, the account would be closed with the benefits transferred to the individual.
One would have to bear a default penalty of Rs.100 per year of default and the account would become dormant. In order to re-activate the account, one has to pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.
EXAMPLE:
A 30 years old person retiring at the age of 60, to get a pension of Rs.2,000 per month at today’s prices, he has to contribute approximately Rs.16,600 every year.
On retiring at the age of 60,one has to compulsorily invest a minimum of 40 percent of pension wealth to purchase a life annuity from an IRDA-regulated life insurer. The remaining pension can be
withdrawn in lump sum or in a phased manner.
If one decides to exit NPS before the age of 60, he would be required to invest at least 80 percent of the pension wealth to purchase a life annuity from any IRDA-regulated life insurer. The remaining 20 percent may be withdrawn as a lump sum.
The annuity also provides for a family (survivor) pension.
To conclude, definitely a savings option is available for private sector employees and with the focus is on living respectfully after retirement, one should consider investing in NPS, despite certain discomforts existing.
P.S: The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
