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Even if you are not part of the organized sector no one can stop you from planning for your retirement needs. The Government has no resources to provide pension to all and it cannot afford to fund basic social security system for the whole nation. So what is the solution?
Well the solution lies with you. It is expected that you save a small portion of your current income, invest it wisely and try and make sure that this the small sum grows enough to give you a comfortable life when you turn older. Also the new kid on the block to help you save for your old age has finally arrived. The New Pension scheme or NPS, is the first of its kind government regulated social security product. This could be your solution to your retirement needs.
Why NPS for retirement?
This is a valid question and needs to be answered first. Do you really think that the currently available products offer you best solution for your old age? Can an 8% return from the Public Provident Fund be enough to support your lifestyle when you are not earning? Or you can take the risk associated with investing only in the share market? If you answered "NO" to the above questions the NPS is your dream product which is best suited for you for your pension needs. Why? We explain more:
Less expensive-
Apart from market-related return, new pension scheme offers fund management by widely acclaimed pension fund managers (PFMs) at negligible expenses. These fund managers are charging just Rs.90,000 for managing Rs.1000 crores. If you look at the percentage it is only 0.0009% of the amount managed. Compare this with the expenses of mutual fund schemes which are pegged at 2.5%. Critics may say that NPS is not as cheap as it is portrayed to be. If a person deposits Rs. 500 in his pension account every month, his charges are Rs. 40 (account opening charge)+ Rs. 240 (Rs.20*12 transactions)+ Rs.350 (depository charges). This means Rs.630 has to be paid on an investment of Rs.6000. It is almost 10% of the amount invested. To counter such charges, PFRDA has launched a low-cost scheme NPS lite which will attract only Rs.105 for investment up to Rs.12000 in a year. From the second year, the charge will be reduced to Rs.70 only. So if you are depositing an amount of Rs.1 lakh in NPS it will charge you Rs. 630 whereas a mutual fund may charge you up to Rs.2,500 and ULIP may take away almost 40 thousand. So the Mantra is to invest 1 lakh and not just Rs.6000. And remember the earlier you start saving for retirement the better return you earn in the end.
Return?
Now, come to the return part. Ok the not so good news is that the NPS doesn't guarantee any return. But the good news is that it gives you several options to invest in. You may choose investment options like equities, corporate bonds and government securities. If you are not able to decide upon the options, you may go for an automatic route and let the fund managers customize an investment pattern for you depending upon your risk - return profile. The pension fund managers, who have been managing government pension funds, have given a return of 12% and upward. What about the PFMs managing pension fund of the common man, the employees of unorganized sector? It is well reflected in the NAV published on daily basis. If we average it out at 10%, a person depositing Rs. 1 lakh a year into pension fund account will get approximately Rs 1.8 crore after 20 years. This is almost 50 lakh more than the return of ULIP and mutual fund.
Most of the tax breaks-
To get tax break, pension fund is a good investment avenue. In fact, why did we choose to give you an example of Rs. 1 lakh per annum saving into pension scheme? Because this is the amount a salaried person can save for tax benefits under section 80C. Your investment into pension fund will qualify for tax rebate under section 80C of the Income Tax Act 1961 within the prescribed limit of Rs. 1 lakh in a single financial year. In fact, under revised direct tax code, new pension scheme has been classified under EEE (Exempt-Exempt-Exempt scheme). This means, once your money goes into NPS account it will not be taxed at all, yes even at the time of withdrawal.
Rich in liquidity-
Pension accounts are locked for the period till you attain the age of 60 years and therefore, it lacks liquidity. This issue is yet to be sorted out. No pension account has been equipped with any exit window, but the investors opening pension account have been given an option to open a separate savings account called 'tier two' account. Money deposited in tier two accounts will be managed by the same fund managers, who also manage your pension account, but you will be permitted to withdraw money from this account as and when you desire. Thus the lacuna of liquidity has been resolved. Till date more than one thousand accounts have been opened.
How it works?
NPS works like a mutual fund scheme. You deposit your money into pension fund account and the designated pension fund manager will be entrusted with the task of managing it. You will be allotted units against your investment amount and see it growing with the daily declared Net Asset Value (NAV). You can check your corpus deposited into your account and its value at that particular date. But who are the people managing the fund? PFRDA has empanelled six Fund managers –
SBI Pension Funds Pvt. Limited, UTI Retirement Solutions Limited, IDFC Pension Fund Management Co. Limited, ICICI Prudential Pension Funds Management Co. Limited, Kotak Mahindra Pension Fund Limited and Reliance Capital Pension Fund Limited. Choose any one of them.
The Negatives-
It's noteworthy that the state owned Life Insurance Corporation (LIC) mopped up around Rs 7,500 crore from its single pension product Market Plus, whereas PFRDA has been able to garner around 35 crore only in one year from the public. Why? One, it has not been marketed properly. Two, fund manager are not interested in selling this scheme as their earnings are very low. Three, the product was designed as if it has to be bought and not sold. But the big question still remains - where to buy and how we will know about the product? Well we too have no answer. You have to log on to pfrda.org.in where you can find out the list of the sellers known as point of presence. These PoPs are limited in number and if you are in a small town without access to the internet it will be almost impossible to buy a NPS.
The NPS Lite for POOR-
This is nothing short of social revolution. Now even a farmer, a rickshaw puller and an anganwaadi woker can withdraw pension when he/she attains the age of 60. Pension Fund Regulatory Development Authority (PFRDA) has come up with a novel scheme, the New Pension Scheme-Lite (NPS lite). This scheme allows a person to save just Rs 1,000 a year can get pension from the same regulator who regulates the pensions of IAS, IPS officers and other government employees. In the current financial year, government is providing a subsidy of Rs 1,000 to all those who open a pension account with PFRDA (subject to an annual investment limit of Rs 12,000). The thought of retirement has been so depressing primarily due to the economic uncertainty. Governments the world over have been attempting to create a viable social security system for the retired people. This has resulted into social security umbrella in the form of pension system. So all we can now hope for is a better sense of security for that time in our lives which are meant to be enjoyed after the years of tolling are over.
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