IF you are looking at building your retirement corpus, you can consider the New Pension System (NPS). Launched by the Indian government, the Tier-I scheme offered by NPS is a pension scheme that allows investors to choose their own investment options and pension fund managers.
Open to anyone between 18 and 55 years, a minimum of `6,000 needs to be invested every year, until he/she turns 60. At maturity (60 years), investors would be required to invest a minimum of 40 per cent of the accumulated amount to purchase a life annuity. The remaining can be withdrawn in a lump sum or in a phased manner.
Investing `6,000 every year at a 12 per cent interest rate, for the maximum term of 37 years, one would have collected a corpus of over `3.65 crore. However, these returns are not guaranteed and depend on how the pension fund you choose (out of the designated seven) actually performs. Like any other pension scheme, NPS invests in government and other debt products. Its equity investments will be capped at 50 per cent.
At present, there aren't many pension products to choose from. Besides the Public Provident Fund (PPF), there are just a couple of plans in the mutual fund and the unit-linked insurance pension products segment. Most insurance companies have pulled out their unit-linked products after the Insurance Regulatory Development Authority (Irda) came up with a 4.5 per cent guaranteed returns mandate. However, the traditional retirement plans offered by insurance companies remain a good option with their builtin guarantees, and option for loans against the cash value of the policy.
While PPF remains a popular investment avenue, the restriction of investing `70,000 every year works against it. There is no upper limit for investment in NPS and others.
However, it is with regard to fund management charges (FMC) that NPS really scores. While FMC for NPS is a mere 0.0009 per cent or 90 paise a lakh, it is one per cent or 1,000 per lakh in case of mutual funds. Insurance companies charge up to 1.35 per cent or `1,350 per lakh.
Many believe that the long lock in period for the pension scheme works against NPS. PPFs and other existing pension plans that allow partial withdrawals are far more liquid. At present, all annuities coming out of pension products are taxable as income. It will be the same in case of NPS, too. Even in terms of tax benefits, tax free PPFs may be abetter option than NPS, which at 12 per cent may not give attractive post-tax returns.