Choosing NPS for retirement planning? You can do better

If you are someone who on retirement wants to say “Goodbye tension, hello pension,” you might have already heard about the National Pension Scheme (NPS). Recently, the Pension Fund Regulatory Development Authority (PFRDA) gave tantalising details of how some NPS funds gave mouth-watering returns - of up to 14 percent for Financial Year 2012-13. And yet, the NPS, which was launched in 2009, has not found favour with financial advisors over the years.

But the tide of popular opinion on the utility of the NPS may be turning. The consideration that if you are planning for retirement. NPS may be a worth a second look is gaining a bit of traction, as this report in the Economic Times notes .

Before deciding to invest in any financial instrument, you must consider a few parameters, such as the product structure, costs and features. You also need to identify your investment objectives, financial goals and risk profile. That will help you assess how well the financial instrument meets those objectives.

[caption id=“attachment_871345” align=“alignleft” width=“380”] Picture: Kenteegardin/Flickr[/caption]

According to the report, the NPS is “cost-effective, despite the designated pension fund managers now being allowed to prescribe their own fee, subject to the ceiling of 0.25%.” In fact, the NPS has one of the lowest fund management charges as compared to pension/ fund management schemes, and since it comes with a lock-in-period, it also makes a good long-term investment option.

As far as the product structure goes, the plan gives various debt-equity ratio options to choose from, even an automated option where your equity exposure as a proportion will decrease with your age. And, of course, the instrument comes with tax benefits. The ET article also mentions that with NPS you can withdraw 20 percent of the corpus prior to 60 years of age. And on turning 60, you can withdraw 60 percent of the corpus while the remaining 40 percent has to be annuitised on a compulsory basis. All this, the article suggests, makes the NPS worthy of a good look. You can read the Economic Times article here .

Firstpost take: The NPS may have given double-digit returns for FY 2012-13, but when it comes to a long-term investment, looking only at a year’s returns is not a wise thing to do. After all, the returns here are market-linked, so there is no guarantee that the returns will continue to be as good in the future. Also, let’s not forget that when the NPS was initially launched, fund managers were required to invest in equities only via index funds, whereas now they are permitted to directly invest in stocks. Of course, this comes with some conditions that apply from the regulator’s side. We think the NPS in its original form was a good product. The amended version may not be a good option, especially if you prefer an equity exposure higher than the maximum 50 percent allowed here. Also, for those looking to invest in debt-heavy scheme, the NPS may hold value only after exhausting the allowable investment limits on the Public Provident Fund and the Employees Provident Fund.

Disclaimer: The story aims to help readers with their money related decisions and choices. Each individual has his or her own financial situation and circumstance. We recommend that you consult a Certified Financial Planner before you buy a financial product or service.