What is NPS
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
This is the lowest cost self financing Social Security tool. Annual record keeping as well as fund management charges are lowest than any other investment options.
This is the first time that govt has come up with any scheme where you have got the option to take benefit of equities investment which can increase your wealth like geometric progression though it might be risky
A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By 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.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
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.
Who shall be responsible for protecting my interests as a NPS subscriber?
A) The Pension Fund Regulatory and Development Authority, the regulator, will protect your interest.
What is the process for enrolling in NPS?
A) Eligibility: 18-55 years of age. Upon registration, you 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.
Would my personal information be confidential?
A) Yes.
Under what circumstances can my account be closed before attaining retirement age?
A) The account would be closed under following circumstances: death, account value reduces to zero and change in citizenship status.
Can I exit before attaining the age of 60 years?
A) Yes, provided you annuitise at least 80 percent of your pension corpus.
What if I do not exit the system at or before 70 years?
A) In that case, on attaining 70 years, your account would be closed with the benefits transferred to you.
Can someone else make contributions on my behalf?
A) Yes.
What would be the penalty in case I am unable to contribute the minimum annual contribution?
A) You 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, pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.
Are there any investment returns guarantees?
A) No. NPS is a defined contribution scheme and the benefits would depend upon the amounts contributed and the investment growth up to the point of exit from NPS.
Will I be permitted to select more than one pension fund to manage my savings?
A) You have to select only one fund. However, the regulator may allow the subscribers to choose more than one fund in future.
What if I do not select any investment option?
A) All your contributions would be channeled into a life-cycle fund.
What are the risks of investing in NPS?
A) As with every investment, there is a degree of risk under NPS also. The value of your investment in NPS may rise or fall.
I am 30 years old and would like to retire at 60. I want a pension of Rs.2,000 per month at today's prices when I retire. How much do I need to contribute?
A) You would need a pension wealth of Rs.319,000 (at today's prices) at the age of 60 to get a pension of Rs.2,000 per month. To realise this, you would need to contribute approximately Rs.16,600 every year.
What will happen to my savings after I retire at 60?
A) You will have to compulsorily invest a minimum of 40 percent of your 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.
What will happen to my savings if I decide to exit NPS before the age of 60?
A) You would be required to invest at least 80 percent of your pension wealth to purchase a life annuity from any IRDA-regulated life insurer. The remaining 20 percent may be withdrawn as a lump sum.
Will the annuity also provide for a family (survivor) pension?
A) Yes, you will have an option of selecting an annuity which will pay a survivor pension to your spouse.
On my death, can my nominee continue to operate the account in my name?
A) No, the balance standing to the subscriber's account may be transferred to the nominee's account after following regulator KYC procedure.
Can I opt not to exit in case of disability?
A) Yes.
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