16 Nov Why The New Pension Scheme (NPS) Is A Viable Retirement Product Now?
At first, the New Pension Scheme was launched to a very lukewarm response from investors/policy holders and there were not many subscribing to it and most even chose to subscribe to EPF or Employee Provident fund as a retirement scheme. To make it more attractive, the scheme has undergone a lot of changes pertaining to fund management, distribution and tax advantages.
In EPF, along with EEE, the most lucrative benefit is the flexibility of one-sided withdrawal for some important needs that arises in one’s life. This was missing in NPS and there was massive demand for it from the investors. Bearing this in mind, now the PFRDA has come up with new rules in which they consent to partial withdrawals well before the retirement age. There have brought in some more changes, making it now a more viable retirement product in the Indian Market.
Let’s compare the old rules with the new changes and how they benefit its subscribers:
The old rules are:
National Pension Scheme is aimed at accumulating corpus for your retirement and therefore, previously, withdrawal was not authorized from this scheme until the investor reaches the age of 60 years. Even premature exits were allowed with a condition that 80% of the accrued corpus was converted into annuity. So a subscriber has to obligatorily make a contribution until the age of 60 years with the minimum contribution being Rs 6,000 per annum.
This contribution was then invested in the equity market, government securities or other fixed income investment options that were pre-decided by the subscriber. One could either opt for auto allocation attribute of the investment or manage allocation himself. The investment in equity market is restricted to 50% and is primarily a passive investing through index funds. Once the subscriber turned 60, as per the old rule, he had to compulsorily take 40 percent of the corpus in annuity form and rest can be withdrawn by the subscriber. So, in actual fact, it was wholly aimed at retirement with no premature withdrawal allowed from it.
The new rules are:
The withdrawal rules have now been changed by the PFRDA. Now, the subscriber can withdraw 25% of the contributions made in these years to meet some of his/her life goals. These can pertain to children’s education, marriage, buying land or property or construction, or medical treatment on some specified diseases, which is similar to EPF. NPS will cover 13 critical (recognized within the scheme) illnesses. This flexibility of the partial withdrawal can be utilized 3 times during the period of NPS. But after making one partial withdrawal, there has to be a gap of five years for making second and third withdrawal, respectively. Relief also has been given on medical treatment where in this time gap will not apply. So even after the withdrawal, if there is a medical urgency, subsequent withdrawal can be made without any hold.
Also, 60 was the default retirement age for NPS and one could exit only at this age, this was applicable to both corporate employees and self-employed professionals. But since there is default retirement age in many companies is 58 years, the flexibility has been introduced where in a subscriber of a corporate NPS- new pension scheme can exit from it at the age of retirement that is set by his/her company.
Now, the policy holder will have to obligatorily take 40% of the corpus in annuity form and the residual can be withdrawn as lump sum. The other challenges that are faced on the verge of retirement is the need of more pension. Many a times even at the age 60 years, the accumulation for the right amount of pension is not enough. To address this issue flexibility has been introduced for non-government employees.
Now if one wishes to contribute longer, they can do so by lengthening NPS contributions until the age of 70. Once that age is reached, there can be further contributions made and the subscriber has to exit from the scheme.
It is also important to remember that one can defer the receivable of pension for three years which will be advantageous to subscribers who have opted for a little portion in equity and they find markets not in favor when reaching the vesting age. In addition, if the sum of the corpus is Rs 2 lakh and below at the retirement age or Rs 1 lakh and below before it, then the entire corpus needs to be withdrawn and there is no conversion to annuity.