The ‘New Pension System (NPS)’ is a contribution-based pension scheme initiated by Government of India for the purpose of delivering income security to all citizens at their old age. According to a good number of financial advisers ‘New Pension System (NPS)’ is the most cost effective mode of retirement planning. Here we discuss the investment strategies of NPS in brief, past performances of the scheme and SWOT analysis of the scheme to find out whether it provides you peaceful retirement plan?
Investment strategies of NPS
The subscribed funds of NPS are invested on asset classes like equity fund (E), corporate bonds(C) and government securities (G) in various proportions to earn balanced regular income. The subscriber has the privilege of taking own decision on allocation of funds on each asset class mentioned above under ‘Active Choice’ plan. Else, funds Managers will take these decisions themselves under ‘Auto Choice’. The investments on various asset classes are subject to as per defined formula based on age of the subscriber. In all cases, either active choice or auto choice, maximum investment in equity related assets cannot be more than 50% of total allocation.
Let us just have a look at the past performances of the funds. NPS has earned double digit returns for the financial year 2012-13, as per PFRDA press release. But, the poor show of NPS during 2013-14 has dragged down the long term SIP return to below 8%. As per news in ‘Economic Times of India’ dated 29.04.2014 the investment of NPS on Central Government and State Government schemes for the financial year 2013-14 were disappointing with average SIP returns of 5.37% and 4.96% respectively. However private sectors who put maximum 50% of money in stock (Equity) market during the same period earned 13.7%. During 2013-14, investment on Corporate Bonds gave a return of 10.64% and for Ultra safe investors who abstained from investments on equity related assets earned just 3.20% on average for the above period.
Safety and security of the funds: NPS is considered as a safe retirement fund as it has many inbuilt safety nets. This is to ensure that the minute amount of risk is being removed from the investment.
Return on the investments: The returns on the scheme so far are decent if not spectacular. Therefore expectations are running high on this long term serving instrument.
Cost of maintenance of the account: The account maintenance costs under NPS are the lowest compared to retirement plans offered by others organizations like Insurance companies and Mutual Funds. Since NPS planning is a long-term investment, the money saved by you on account of transaction and maintenance charges for a period of 30-40 years would be certainly a big amount to count.
Tax benefits: Contribution towards NPS reduces your tax liability by availing the deductions u/s 80CCE which will be up to Rs.1.50 lakh and an additional deduction of Rs.50, 000/- under section u/s.80 CCD (1B) [applicable from FY 2015-16/AY 2016-17]. This additional benefit is not available for any other tax saving instruments. The additional deduction of Rs.50000/- available on NPS is a big incentive to investors. If you are in the tax bracket of 30% you will be able to save Rs.15450/- on investment of Rs.50000 u/s 80 CCD (1B) of income tax act.
Weakness: The retirement planning under NPS scheme is relied on market-based returns. In the absence of guaranteed returns from pension investments, you are not sure of getting the assured result at the end of the day and that is something that you should think about. Secondly, the investments of NPS are heavily tilted towards risk-shy assets. This is to ensure minimum assured returns from the investments in spite of such assets provide lowest returns. The tilt towards investments in risk free products with minimum assured returns might fall short of the targets in a long-term situation where the chances of inflation rate ends up eating the returns in terms of purchase value. Over and above, withdrawal from NPS are taxed under EET system as opposed to tax-free status on other retirement savings schemes like public provident fund (PPF) and employees’ provident fund (EPF).
The subscriber’s money in NPS grows compounded with accumulated income every month. The power of monthly compounding makes NPS an attractive retirement solution. The scheme is a striking middle ground between bank deposits and the securities market as it enjoys additional tax sops and regulated Asset management.
The subscriber has a flexible investment option in NPS as he is allowed to take the choice of investment within the prescribed limit of investment fixed by the PFRDA. Unlike retirement plans offered by other organizations like Insurance companies and Mutual Funds, the subscribers have the opportunity to switch over from one fund manager to another. The subscriber is also having opportunity to switch over from one investment option to another. Thus, the scheme provides multiple opportunities to investors change the invest plan or change the funds manager if he is not satisfied with the level growth in the hands of existing funds manager.
Threat: NPS retirement plan runs for the average period of 30-40 years. The safety net built on the scheme is based on perceiving risk factors in the present situation. There could be the mismatch between the kind of risk perceived today and the actual risk for the investment till the period of subscriber exit from the scheme.
Introduction of National Pension System (NPS) for Non-Resident Indians
In view of providing old age income security to the Non-Resident Indians (NRI), the investment option for NRIs under FEMA, 1999 is now introduced. Under the scheme, notified by RBI on October 29, 2015 the Non-Resident Indians (NRIs) may subscribe to the NPS governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA) as per the provisions of PFRDA Act. The subscriptions shall be paid either by inward remittance through normal banking channels or out of funds from NRE/NRO/FCNR accounts. There shall be no restriction on repatriation of the annuity/accumulated savings.
Related article: i. Details of New Pension System (NPS), ii. Swavalamban Yojana: Pension scheme for all citizens in the unorganized sector