Benefits of National Pension Scheme
The NPS offers you two approaches to invest your money:
Ø Active choice - Individual Funds (Asset Class E, Asset Class C, and Asset Class G )
Ø Auto choice - Lifecycle Fund
Under NPS you will have the option to actively decide as to how your NPS pension wealth is to be invested in the following three options:
Asset Class E - investments in predominantly equity market instruments.
Asset Class C- investments in fixed income instruments other than Government securities.
Asset Class G - investments in Government securities.
Asset class E (equity market instruments) - The investment by an NPS participant in this asset class would be subject to a cap of 50%. This asset class will be invested in index funds that replicate the portfolio of either BSE Sensitive index or NSE Nifty 50 index. Index Fund Schemes invest in securities in the same weight age comprising of an index. The PF will have to choose which index they intend to track in advance on a yearly basis. The permitted cap, as mentioned above, is expected to be maintained at that level at all points in time. However, the amount of funds invested in that asset class can differ from the specified cap by no more than 5% for purposes of portfolio balancing.
Benchmark - the performance of the scheme will be measured by reference to the total performance (dividends reinvested) of either BSE Sensex or NSE Nifty 50 Index, as chosen by the PF. The PF will have to choose which index they intend to track in advance.
Performance objective - the investment objective is to optimize returns while investing in the chosen index over a rolling annual basis
Asset class G (Government Securities) - This asset class will be invested in central government bonds and state government bonds
Performance objective - the investment objective is to optimize returns.
Risk - It is expected that the PF will be able to identify and justify the additional risks relative to the return, while managing the portfolio on an absolute return basis
Asset class C (credit risk bearing fixed income instruments) - This asset class contains bonds issued by any entity other than Central and State Government. This asset class will be invested in liquid funds of Mutual Funds, credit rated debt securities. This includes rated bonds/securities of Public Financial Institutions and Public sector companies, rated municipal bodies/infrastructure bonds and bonds of all firms (including PSU/PSE) , subject to restrictions outlined in section 2 below.
Performance objective - the investment objective is to optimize returns.
Risk - It is expected that the PF will be able to identify and justify the additional risks relative to the return, while managing the portfolio on an absolute return basis.
While exercising an Active Choice, remember that your investment allocation is one of the most important factors affecting the growth of your pension wealth. If you prefer this “hands-on” approach, keep the following points in mind:
National Pension Scheme (NPS) - We will definitely explore if ‘investing in NPS is a wise option or not’ in next write-up but before that as an aware investor, do go through about the concept of NPS and how it is structured in this write-up.
About National Pension Scheme
NPS is available to all citizens of India with effect from May 1, 2009, other than Government employees already covered under NPS with the motive to promote old age income security
Under NPS following two types of accounts will be available to you:
Tier-I account: You shall contribute your savings for retirement into this non-withdrawable account.
Tier-II account: This is a voluntary savings facility. You will be free to withdraw your savings from this account whenever you wish.
While Tier-I account is available from May 1, 2009, the facility of Tier II account is offered from December 1, 2009 to all citizens of India including Government employees mandatorily covered by NPS.
1. The facility of Tier II account is available from December 1, 2009 to all citizens of India including Government employees mandatory covered by NPS, who hold a Tier I account.
2. Unlike Tier I which is a non-withdrawable pension account, Tier II is a withdrawable account with an aim to provide a window of liquidity to NPS subscribers. Both Tier I (Pension Account) and Tier II (Savings Account) will be pure retirement savings products, the only distinction being that Tier- I is a non- withdrawable account while Tier-II is a withdrawable account to meet financial contingencies.
3. The Tier-II would enable the existing Permanent Retirement Account (PRA) holders to build savings over and above the investments in the Tier I pension account. An active Tier I account is a pre-requisite for opening a Tier II account.
Enrollment to NPS: To enroll in the NPS, one needs to submit the Composite Registration Form (UOS-S1) to the POPSP of your choice. The list of POP - SPs is available on the PFRDA website www.pfrda.org.in, on the CRA website www.npscra.nsdl.co.in and on the website of the concerned POP.
For Tier-I account:
Ø You are required to make your first contribution at the time of applying for registration at any POP - SP.
Ø You are required to make contributions subject to the following conditions:
Ø Minimum amount per contribution - Rs 500
Ø Minimum contribution per year - Rs 6,000
Ø Minimum number of contributions -01 per year
Ø Consider both risk and return. The E Asset class has higher potential returns than the G asset class, but it also carries the risk of investment losses. Investing entirely in the G asset class may not give you high returns but is a safer option.
Ø You can reduce your overall risk by diversifying your investment. The three individual asset classes offer a broad range of investment options, it is good not to put “all your eggs in one basket.”
Ø The amount of risk you can sustain depends upon your investment time horizon. The more time you have before you need to withdraw from your account, the more is the risk you can take. (This is because early losses can be offset by later gains.)
Ø Periodically review your investment choices. Check the distribution of your account balance among the funds to make sure that the mix you chose is still appropriate for your situation. If not, rebalance your account to get the allocation you want.
Allocation of funds across asset class for “Auto choice”
The methodology for allocating funds in the three asset classes under ‘Auto Choice’ are outlined below:
NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice as regards asset allocation, your funds will be invested in accordance with the Auto Choice option. You will, however, be required to indicate your choice of PFM. In case you do not do so, your form shall not be accepted by the POP-SP.
In this option, the investments will be made in a life-cycle fund. Here, the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age.
Like the active choice, you must choose one PFM under the auto choice.
The table below illustrates the allocation of each asset class for “Auto Choice” option based on age of the investor.
THE PENSION FUNDS AVAILABLE UNDER NPS (in alphabetical order)
Ø ICICI Prudential Pension Funds Management Company Limited
Ø IDFC Pension Fund Management Company Limited
Ø Kotak Mahindra Pension Fund Limited
Ø Reliance Capital Pension Fund Limited
Ø SBI Pension Funds Private Limited
Ø UTI Retirement Solutions Limited
What are the benefits of joining the NPS?
Ø It is voluntary- NPS is open to every Indian citizen. You can choose the amount you want to set aside and save every year.
Ø It is simple- all you have to do is to open an account with any one of the POPs and get a PRAN.
Ø It is flexible- You can choose your own investment option and Pension Fund Manager and see your money grow.
Ø It is portable- You can operate your account from anywhere in the country, even if you change your city, job or your pension fund manager.
Ø It is regulated- NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
Withdrawal in NPS
On attaining the Normal Retirement Age (NRA) of 60 years - You will be required to compulsorily
Ø annuitize at least 40% of your pension wealth and the remaining 60% can be withdrawn as a lump
Ø sum or in a phased manner; in case, you opt for a phased withdrawal:
Ø Minimum 10% of the pension wealth should be withdrawn every year.
Ø Any amount lying to the credit at the age 70 should be compulsorily withdrawn in lump sum.
Withdraw any time before 60 years of age- In such case; you will have to compulsorily annuitize 80% of your accumulated pension wealth. The remaining 20% can be withdrawn as a lump sum.
At any point in time before 60 years of age
You would be required to invest at least
80% of the pension wealth to purchase a
life annuity from any IRDA - regulated life
insurance company. Rest 20% of the
pension wealth may be withdrawn as lump
On attaining the Age of 60 years and upto
70 years of age
At exit you would be required to invest
minimum 40 percent of your accumulated
savings (pension wealth) to purchase a life
annuity from any IRDA-regulated life
You may choose to purchase an annuity for
an amount greater than 40 percent. The
remaining pension wealth can either be
withdrawn in a lump sum on attaining the
age of 60 or in a phased manner, between
age 60 and 70, at the option of the
Death due to any cause
In such an unfortunate event, option will be
available to the nominee to receive 100% of
the NPS pension wealth in lump sum.
However, if the nominee wishes to continue
with the NPS, he/she shall have to
subscribe to NPS individually after following
due KYC procedure.
NPS offers Indian citizens a low cost option for planning their retirement. A 0.0009%* fee (based on assets under management) for managing your wealth, makes pension funds under NPS perhaps the world’s lowest cost money managers.
What is Swavalamban Scheme?
Under the scheme, Government will contribute Rs. 1000 per year to each NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12, 2012-13 and 2013-14. The benefit will be available only to persons who join the NPS with a minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.
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