All About New Pension System/Scheme (NPS)
The New Pension Scheme also known as NPS is effective from 1st April 2009.
Under this scheme, any Indian citizen can open the account with the government of India to save for his/her retirement. Well, let me tell you that this scheme is not only for government employees but this scheme is also for the Non-Government employees who work in the private sector companies.
What is the Purpose of NPS?
Let us understand this in layman’s language. Well, purpose of anyone in this world working as an employee is the peaceful retirement. I mean people work hard during their active life so that they can save enough on which they can live after their retirement.
The retirement age in India is 60 years (In very special cases it is 65) but because of the advancing medical facilities, the life expectancy has been increased. Previously people used to live up to the age of 70 years only but now because of the advanced medical services, people live well above 80 years.
And that’s why now the post-retirement life is increased.
Now, the government employees get the life time pension. Well, but what about the non-government employees who work in private sector? Well, they will have to build their retirement corpus by their own and that’s why NPS is the pension scheme for those people who want to build their retirement corpus by their own so that they can live happily on this corpus after their retirement.
Highlights of NPS -
The NPS would be administered by the Pension Fund Regulatory Development Authority (PFRDA).
A Central Recordkeeping Agency (CRA) would maintain all the records (like account balances) related to the NPS. National Security Depository Limited (NSDL) has been selected as the nationwide CRA for the New Pension System.
There would be six Pension Fund Managers (PFMs). The PFM would be responsible for investing your funds and generating returns from them.
There are also entities called Points of Presence (PoPs). The PoP would be responsible for the sales and marketing of the NPS. (These are similar to the distributors for mutual funds).
List of Pension Fund Managers (PFMs)
- ICICI Prudential Life Insurance Company Limited
- IDFC Asset Management Asset Management Company Limited
- Kotak Mahindra Asset Management Company Limited
- Reliance Capital Asset Management Company Limited
- SBI Pension Funds Limited
- UTI Retirement Solutions Limited
- Allahabad Bank
- Axis Bank Ltd.
- Bajaj Allianz General Insurance Co Ltd.
- Central Bank of India (CBI)
- Citibank N.A.
- Computer Age Management Services Private Ltd.
- ICICI Bank Ltd.
- IDBI Bank Ltd.
- IL&FS Securities Services Ltd.
- Kotak Mahindra Bank Ltd.
- Life Insurance Corporation of India (LIC)
- Oriental Bank of Commerce (OBC)
- Reliance Capital Ltd.
- State Bank of Bikaner & Jaipur (SBBJ)
- State Bank of Hyderabad
- State Bank of India (SBI)
- State Bank of Indore
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Travancore
- The South Indian Bank Ltd.
- Union Bank of India (UBI)
- UTI Asset Management Company Ltd.
Each investor in the NPS would be allotted a Permanent Retirement Account Number (PRAN). This would be a unique identification number that would be used to identify an investor irrespective of his PFM.
The PRAN would be issued to investors by the RCA.
Types of Funds -
According to your risk appetite, you can chose to invest in Growth and Safe funds. Obviously, the Growth funds will be equity driven and the safe funds will be debt oriented.
Equity Investing Strategy -
Let me tell you that what would be the Investing strategy of NPS for Equity?
The investment would be passive – there wouldn’t be any active buying and selling of stocks based on the fund manager’s analysis. Instead, funds would be invested only in the 50 stocks comprising the NSE’s NIFTY stock index.
Debt Investing Strategy -
If you chose a debt fund than it will invest all of your money in Government securities which is 100% Safe and Secure.
Switching Facility is Available -
You can also choose to transfer your money between various funds and fund managers.
Charges associated with NPS -
The biggest benefit of NPS compared to any other investment plan or scheme is the minimal cost involved. The very low fee is the biggest advantage of the NPS.
01) Fund management charge
Compared to the high management fee of most other investment options, the management fee for NPS is peanuts – it is less than0.01% per annum! Compare this with about 1.75% to 2.25% per year charged by equity mutual funds.
02) Record keeping fee
The annual record keeping fee for NPS would be just Rs. 280. This is comparable to the annual charges levied by depository participants (DPs).
03) Transaction fee
Each transaction would cost Rs. 6. Thus, if you make a monthly deposit of say Rs. 2,000, you would be paying Rs. 6 as the transaction fee and the remaining Rs. 1,994 would be invested on your behalf.
Compare this with the 2.25% entry load charged by most mutual funds In this case, you would pay Rs. 45 as the entry load, and only Rs. 1955 would be invested on your behalf.
Withdrawal Facility -
Well, this is a pure retirement plan so simply forget about the withdrawals. You won’t be allowed to withdraw any money before the age of 60 years except some special circumstances such as buying your own home or the marriage of your children.
Withdrawal on Maturity:
You would not be able to withdraw the full accumulated amount as a lump sum.
You would be allowed to take out 60% of the corpus as a lump sum, and would need to invest the remaining 40% in an annuity.
Annuity is an instrument that would provide a fixed monthly amount to you in return of the fixed lump-sum investment by you (40% of your accumulated corpus in this case). Thus, it would act as your pension after your retirement.