National Pension System (NPS): An Overview
Retirement planning is one of the most important factors to consider, when it comes to the life of an individual. Afterall, post all the hardwork that they put to provide for their families or even themselves, everyone deserves a relaxed retirement. This is one of the most significant incentives that gives one the motivation and reason to continue working until they reach their retirement age.
However, planning your retirement is much easier said than done. Thus, to simplify this, the Government of India came up with this initiative called the National Pension System, commonly known as NPS. This long-term and voluntary retirement plan comes under the Pension Fund Regulatory and Development Authority (PFRDA).
What Exactly Is National Pension System (NPS)?
Every individualapart from the ones employed by the armed forces can reap the benefits of this scheme. This includes people from private and public sectors as well as employees and self-employed from all sectors of the country.
When an individual is in the course of their employment, they can invest in the NPS at regular intervals. Post-retirement, a certain percentage of the corpus can be withdrawn, and the remaining amount will be used to provide pension through annuity service providers.
This offers an ideal way for people employed by the private and unorganized sectors of the country. In addition, the scheme allows every Indian citizen to reap the benefit of it regardless of their state or union territory. There is tax benefit under section 80C. The amount utilized to purchase annuity is also not taxed.
Basic Features of The National Pension System (NPS)
NPS offers you a method to save money and create a corpus amount. This money you accumulated by saving through NPS is used to purchase an annuity option which will provide you monthly pension. To understand clearly divide yourretirement planning into two stages.
First stage is to accumulation phase and the second stage is pension phase or annuity phase.
First Stage – Accumulation Phase.
Understand NPS is there only during the accumulation Phase.
After you retire you will take all the money and exit from NPS and choose an annuity option which will provide you pension. Effectively NPS does not provide pension but only helps to save yourmoney and create a huge lumpsum amount which is used to take care of your retired life. Suppose if you feel that you can create this lumpsum from other saving options like bank and mutual then you will not need NPS. However, NPS will bring in discipline in to your saving. As you are making a specific allocation towards your retirement goal and also provides tax benefits on the investment made and also the amount you take out from the scheme to purchase your annuity plan.
When you buy a NPS, first approach a POP SP (point of presence – service provider). Many banks are authorized POP SP. They will help you enroll into the scheme under NPS Tier-1 option. Here you will be required to choosePension Fund Manager of your preference and further choose where you wish to invest your money. There are various funds like equity, government bond, corporate debts, and alternative investment. This is similar to how mutual fund works. NAV is declared on the performance of these funds. The performance of your investment depends on your fund choice. If you are thinking is there any fixed interest rate of return on your investment in NPS. The answer is a big NO. NPS will not guarantee you with a fixed percentage return like your Bank fixed deposits and some post office schemes. It is very similar to mutual funds and strictly regulated on how the money should be invested.
Second Stage – Annuity or Pension Phase
Now that you have created a corpus money (lumpsum money) with the help of enrolling in NPS fund of your choice and you have made disciplined regular contribution over a period of many years, it is time to exit NPS. If someone started at an age of 30 and retires at 60, the corpus money will be sufficient to provide a decent amount of pension. You have a choice to withdraw 60% of corpus as lumpsum in hand and invest the minimum 40 % in an annuity scheme provided by PFRDA and IRDA authorized Annuity Service Provider of your choice. You can also choose to invest more than more than 40 % or even 100 % into annuity scheme. Annuity Service Providers will provide you many different annuity options and all of them give you a fixed rate of return. Once such annuity option is joint life annuity with return of purchase price. Life time annuity is provided for the annuitant and post their life, the spouse also gets the same amount of annuity. Whatever annuity received is only the interest payout and corpus money will remain intact and will be give to children or legal heir. So, it is your choice to retire happily at the right age and NPS is a good method to take you there.