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National Pension System: A work in progress?

Vasant G Hegde, Dec 4 2017, 0:02 IST
Concept of retirement planning with woman putting coins in glass jar for pensionPension

Concept of retirement planning with woman putting coins in glass jar for pensionPension

In response to the suggestions and feedback received from the Public, corporates and intermediaries, the government has recently increased the maximum age of joining the National Pension System (NPS) from 60 to 65 years for Indian citizens.

Perhaps the increase in life expectancy of people in India and the fact that an increasing number of people above the age of 60 years are leading an active life and are either employed in the private sector or working on their own must have prompted the government to increase the maximum entry age to 65 years in the private sector i.e in the all citizens model and corporate model.

Existing Guidelines on NPS

To recap, NPS was started in 2004 for government employees and extended to all citizens in 2009 to help people save regularly and provide for their financial security and stability during their old age so that they can live with dignity and pride.

Under the existing guidelines, any citizen of India between 18 and 60 years can join the NPS.

A subscriber can open two different types of account under NPS - Tier I (pension account) and Tier II (Withdrawable and no tax benefits).

The minimum contribution in Tier I account is Rs 6,000 per financial year and there is no ceiling on the maximum contributions in a year.

However, an individual can claim tax benefits only in Tier I account up to a maximum of Rs 1,50,000 under Sec 80C. He can also claim an additional tax benefit of Rs 50,000 under Sec 80 CCD (1B).

A subscriber also has a choice of Investment options (Auto or Active), Asset Classes i.e. Equity, Corporate Bond, Government Bond and Alternative Infrastructure Funds and 8 Pension Fund Managers. Here is the lowdown on investment options:

Active Choice

In this investment option, the subscriber can choose where his contribution is to be invested, based on personal preference. The Subscriber has to choose the PFM, Asset class as well as percentage allocation to be done in each of them.

There are four Asset Classes (Equity, Corporate Bond, Government Bond and Alternative Infrastructure Fuds) from which the allocation is to be specified under single PFM.

However, percentage contribution value cannot exceed 50% for Equity Scheme and 5% for Alternative Infrastructure Fund.

Auto Choice-Life Cycle Fund

Under this option, the Scheme Setup (scheme as well as allocation ratio) will be determined by the system based on the age of the subscriber at the time of registration.

Auto Choice is the best option for a subscriber who wants to automatically reduce exposure to more risky investment options as he gets older. As his age increases, the individual's exposure to equity and corporate debt gradually decreases.

Depending on the risk appetite of the subscriber, there are three different options available within 'Auto Choice' - Conservative, Moderate and Aggressive. The exposure to equity decreases while the exposure to G-secs increases as the subscriber gets older.

As per the new guidelines, a subscriber joining the NPS after 60 years would be eligible to continue in the system as well as contribute till the age of 70 years. Further, he will also have the same investment choice and fund manager choice as is available now for other subscribers below 60 years of age.

Exit conditions under new guidelines

The guidelines on percentage of annuity that has to be bought out of the lump sum under normal exit and premature exit is the same as it is for subscribers below 60 years.

Normal exit: An exit after three years will be deemed as normal exit and the subscriber will have to buy at least 40% of the lump sum as annuity and withdraw the remaining corpus.

Premature exit: A subscriber exiting before three years will be deemed as premature exit in which case he will have to buy at least 80% of the corpus as annuity and withdraw the rest.

Exit due to death: The entire corpus will be paid to the borrower.

(The writer is a fromer banker, and is currently with Manipal Academy of Banking, Bengaluru)

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