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How the National Pension Scheme (NPS) Evolved into a Retirement Savior.
Some time in 2019, an app was in vogue. The app could show you how you would look 20, 30 or even 40 years into the future.
People took to social media with disbelief – they were unable to picture themselves in the future. And that, as Daniel Read’s research points out, is one of the main reasons why people defer investing for their retirement. But NPS turned out to be a saviour for such folks.
Planning for retirement is no longer a luxury but a necessity in today’s uncertain world. With dwindling pension systems and increasing life expectancy, governments worldwide are grappling with the challenge of securing the financial well-being of their elderly citizens. In India, the National Pension Scheme (NPS) has emerged as a powerful tool, evolving over time to address this critical need.
Learning From Global Peers: Parallels that Shaped the NPS
The NPS design draws heavily from international best practices. Singapore’s Central Provident Fund (CPF) and Chile’s Defined Contribution Pension System (DCPS) provided valuable insights. Like these schemes, the NPS emphasises individual responsibility for retirement savings, offering investment options tailored to different risk appetites. However, the NPS also caters to the Indian context, allowing employer contributions and providing tax benefits to incentivize participation.
Caring for the Elderly: A Global Responsibility and the NPS as a Solution
One of the most significant challenges facing governments globally is the rising dependency ratio, with a shrinking workforce supporting a growing elderly population. This puts immense pressure on public finances and necessitates proactive measures. The NPS addresses this challenge by encouraging long-term savings and reducing the burden on the government to solely support retirees. By enabling individuals to accumulate a corpus throughout their working lives, the NPS ensures a dignified and financially secure retirement, contributing to overall societal well-being.
The Genesis of NPS: Bridging the Gap for a Young Nation
In 2004, India recognized the limitations of its traditional pension system, which primarily catered to government employees. With a burgeoning young population and rising life expectancy, a sustainable solution was required. Inspired by successful retirement schemes in Singapore and Chile, the NPS was launched as a voluntary, contributory scheme aimed at securing the financial future of all Indian citizens.
Understanding the NPS Today
The NPS has been evolving over the years. Listed is the current structure with developments as of Feb 2024.
NPS allows for two types of accounts: Tier I & II. Let’s look at the difference between the two
Tier I:
- Mandatory for government employees.
- Optional for all Indian citizens aged 18-70.
- Contributions: Individual contributions, optional employer contributions.
- Withdrawals:
- Before 60: Limited to 20% for specific reasons (medical emergencies, children’s education, critical illness). The remaining 80% must be used to purchase an annuity upon maturity.
- After 60: 60% lump sum withdrawal is available through the Systematic Lump Sum Withdrawal (SLW) option in instalments. The remaining 40% is a mandatory annuity purchase.
Tier II:
- Voluntary for all Indian citizens aged 18-65.
- Contributions: Individual contributions only.
- Withdrawals: More flexible than Tier I, but premature withdrawals (before 60) incur tax penalties.
The latest revision in NPS guidelines allows subscribers to opt for the Systematic Lump Sum Withdrawal (SLW) option, which will allow them to receive a portion of their corpus after retirement as monthly, quarterly, or annual instalments for a chosen period, extending up to 75 years of age.
Additionally, the NPS Lite option has now been introduced to cater to low-income earners. This simplified version features lower contribution requirements and easier exit rules, making it accessible to a wider segment of the population.
There has also been a revision in the tax benefits – The deduction limit under section 80CCD(1B) increased to Rs. 2 lakh, with an additional deduction of Rs. 50,000 available under section 80CCD(1).
Management of Funds in NPS
The pension funds manager registered by PFRDA manages the money invested in NPS.
The List of Fund Managers is as Follows:
- LIC pension fund
- HDFC pension management company
- ICICI Prudential pension fund
- Reliance capital pension fund
- SBI pension fund
- Kotak Mahindra pension fund
- DSP BlackRock fund
- UTI retirement solution retirement fund
NPS Investment Options
NPS offers two options:
• Active: Where the investor decides where the money should be invested from the following option (Either one of the following or a combination)
- Asset E: 50 % investment in stocks
- Asset C: Investment in fixed-income instruments other than government securities
- Asset G: Investment in the only govt. securities
• Auto Choice: Default option where the money is automatically invested in line with the age of the scheme holder.
You can change your investment choices once a year! You can even change your scheme and funds manager as well.
Who Can Join NPS and What is the Process?
- Indian citizens aged between 18-60 years can join NPS. One needs to comply with Know Your Customer (KYC) norms! NRIs can also join NPS; however, the account will be closed if there is any change in citizenship status!
- Several financial entities, private and public banks and other authorised branches are enrolled as a point of presence (POP); at these designated places, anyone between the age bracket of 18-60 can go and open an NPS account! To access the list of all the authorised POPs near you, you can visit the Pension Fund Regulatory and Development Authority (PFRDA) website.
- You need to fill in the registration form and submit the necessary documents (IDs) at the POP.
- After enrolment in NPS, a 12-digit card is Issued to every account holder, which is called a Permanent Retirement Account Number (PRAN).
- You cannot open multiple NPS accounts, limited to only 1 account per person.
