Explainer: Why New Pension Scheme is a viable retirement product now
Initially, the New Pension Scheme received a very lukewarm response from investors with not many subscribing to it and with most still preferring EPF or Employee Provident fund as a retirement product. To make it more appealing, the scheme has gone through lot of changes related to fund management, distribution and tax advantages.
In EPF, along with EEE, status the most lucrative benefit is flexibility of partial withdrawal for some important needs which arises in one’s life. This was missing in NPS and there was huge demand for it from investors. Keeping this in mind, now PFRDA too has brought new rules for allowing partial withdrawals well before the retirement age. There are some more changes which the scheme has undergone, making it now a more viable retirement product.
Let's see what these changes are and how they benefit its subscribers:
The old rule
NPS is aimed at accumulating corpus for your retirement. So earlier withdrawal was not allowed from this scheme until the age of 60 years. Even prematurely exiting was allowed with condition that 80% of the accumulated corpus converted into annuity. So a subscriber has to mandatorily contribute until the age of 60 years with minimum contribution pegged at Rs 6,000 per annum.
This contribution is invested in the equity market, government securities or other fixed income investments options as chosen by the subscriber. One can either opt for auto allocation feature or manage allocation himself. The investment in equity market is restricted to 50% and is primarily a passive investing through index funds.
Once the subscriber turns 60, he has to compulsory take 40 percent of the corpus in annuity form and rest can be withdrawn by the subscriber. So effectively it was completely aimed at retirement with no premature withdrawal allowed from it.
The new rule
The withdrawal rules have been changed by the PFRDA. A window has been opened after 10 years of continuation wherein a subscriber can withdraw 25% of the contributions made in these years to meet some of the life goals. These can be related to children education, marriage, house purchase or construction or medical treatment on some specified diseases, which is similar to EPF. To derive eligibility for corporate employees the contribution will include of their own and not the employer's.
NPS will cover 13 critical illnesses which have been listed in the rule. This flexibility of this partial withdrawal can be utilised 3 times during the tenure of NPS. But after making one partial withdrawal, there has to be a gap of five years for making second and third withdrawal, respectively. Relief has been given on medical treatment wherein this time gap will not apply. So even after making a withdrawal, if a situation arises for medical treatment subsequent withdrawal can be made without waiting.
How to exit
Until now, 60 was the default retirement age for NPS and one could exit only at this age. The rule was applicable to both corporate employees and self-employed professionals. But since the default retirement age in many companies is 58 the flexibility has been introduced wherein a subscriber of a corporate NPS scheme can exit from it at the age of retirement set by the company
Here the subscriber will have to mandatorily take 40% of the corpus in annuity form and rest can be withdrawn as lumpsum. The other challenges faced on the verge of retirement is the need of more pension. Many a times even at age 60, the accumulation for the right amount of pension is not good enough. To address this issue flexibility has been introduced for non-government employees.
Now if one wishes to contribute longer, one can do so by extending NPS contributions until the age of 70. Once this age is reached, there are no further contributions allowed and a subscriber has to exit from the scheme.
Apart from this, one can also defer the receivable of pension for three years which will benefit subscribers who have opted for some portion in equity and they find markets not in favour when reaching the vesting age. Additionally, if the amount of corpus is Rs 2 lakh and below at retirement age or Rs 1 lakh and below before it, then the entire corpus needs to be withdrawn and there is no conversion to annuity.
The new withdrawal and exit rules are in favour of investors and bring NPS at par with the biggest retirement product EPF. The changes present an opportunity for subscribers to partially withdraw in exigencies and give time to investments when markets are not in favour. But do remember that this is a retirement product and should be aimed at accumulation of corpus. Make use of withdrawals only if there is no option left. But most importantly, if NPS has been given a miss until now it’s time to include it in your retirement planning.
Guest column by Jitendra P.S.Solanki, a Certified Financial Planner and and a member of The Financial Planners' Guild, India, along with being a SEBI registered investment adviser.
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