Pension for Every Indian - National Pension Scheme - NPS | Retirement Planning

Pension Indians will have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS).

The following are the basic details in common-man’s terms.

1. Methodology and Authorities Involved

The concept basically is a combination of a Mutual Fund (Systematic Investment Plan) and Annuity purchase from Insurance Company, with a Central Record keeping Authority facilitating the choice to the Investor to shift from one Fund Manager to another and between Investment Portfolios while continuing with the same corpus during the Mutual Fund phase.

The Mutual Fund phase would come to an end at the attaining of 60 years of age of the Investor (or earlier if so desired) when the Investor would have to compulsorily withdraw at least 40% (80% in case of earlier exit) of the Mutual Fund Corpus and purchase a lifetime Annuity from any of the approved Life Insurance Companies. The balance amount of the corpus can be withdrawn from the Mutual Fund immediately or in a phased manner before the Investor attains the age of 70.

The authorities involved are

Mutual Fund Stage:

Central Record Keeping Agency: For maintaining the database and corpus details of Individuals and would also allot the Permanent Retirement Account

No. (PRAN) and Telephone PIN (T-PIN) to the investor. Presently, NSDL is chosen as the CRA.

Custodians: The Authority who would be actually maintaining the Assets.

Pension Fund Managers(PFM): The people who would actually manage the Funds and take the investment decisions. Presently there are six Mutual Fund Co.s chosen for this purpose (each a special subsidiary of the main Co. created exclusively for managing the Pension Funds), ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI Capital and UTI AMC. The Investor has the option (once a year) to make the switch from one Fund Manager to another.

Point Of Presence(POP): The link through which the Investor would open the Account and deposit funds. The following are presently chosen as POP Service Providers; Allahabad Bank, Axis Bank, Central Bank of India, Citibank, Computer Age Management Services, ICICI Bank, IDBI Bank, IL&FS Securities Services, Kotak Mahindra Bank, LIC, Oriental Bank of Commerce, Reliance Capital, SBI & its 6 associates, South Indian Bank, Union Bank of India, UTI AMC.

Trustee Bank: The back end Bank facilitating transfer of funds from POP to PFM.

Annuity Stage

Annuity Service Provider(ASP): The Life Insurance Company who would provide the monthly annuity based pension. The Investor is required to compulsorily hand over 40% of the Mutual Fund corpus as available at the age of 60 years. He can also purchase annuity up to 100% of the Mutual Fund corpus.

2. Eligible persons

Indian Citizen (resident or non-resident) within the age group of 18 to 55, subject to compliance of RBI KYC norms. One person can have only one account.

3. Fund Deposit Option

An investor needs to make a minimum of 4 deposits in a year with a minimum of Rs.500 per deposit subject to a minimum deposit of Rs.6000 per year. There is no maximum limit to either the amount of deposit or the number of deposits. Payment can be made by Cash, Local Cheque or Demand Draft.

4. Fees and Charges

Initial Onetime Charges:

Rs.90 service tax (approx. Rs.100 in total at present rates

Annual Charges:

Rs.350 plus 0.0509% of corpus value Plus service taxes. (Approx Rs.386 0.056% of corpus value)

Transaction Charges:

Rs. 30 plus service tax (say approx Rs.33 in total) per transaction.

Transaction for this purpose would include deposits, any change requests, withdrawal request, printed statement request and any other transaction subsequently notified.

Default Penalty:

In case the Investor fails to meet any of the minimum deposit criteria, a default penalty of Rs.100 p.a. would be levied.

5. Fund Investment Options

The Investor is allowed 2 choices is respect of the type of investments to be made with his deposits.

Active Choice

The Investor is provided with three Classes of Investment . E- Equity (High Risk/Return), C- Commercial papers of mainly fixed return nature other than Govt. Securities (medium risk/return) G- Govt. Securities (low risk/return).

The investor has to option to specify any percentage combination among the three (incl. 100% in C or G) subject to a maximum of 50% for E and also indicate the choice of the PFM for this purpose. The investor has the option to annually revise the ratio and/or PFM as per his own evaluation.

Auto-Choice

In case the investor does not want to exercise the Active Choice option, a predetermined ratio would be allocated to his portfolio based on his age starting with 50% E, 30% C and 20% G for persons less than 35 years which would be gradually revised every year to 10% E, 10% C and 80% G by the time he attains 55 years of age. However, he need to indicate the choice of the PFM for this purpose. The investor has the option to annually revise the PFM as per his own evaluation.

6. Risk Profile of Investments

The Scheme does not provide any guaranteed returns. It is based on Mutual Fund concept. The benefits would depend on the performance of the individual fund managers and could differ even between the fund managers.

7. Portability

The Investor can continue with the same NPS-PRAN from any city/town in India by changing his choice of POP-SP.

8. Conclusions

3 & 4 read together implies that if an investor is investing only the minimum amount of Rs.6000 (in instalments of Rs.500 each month) approximately Rs.786 (about 13%) would be deducted for charges and the balance amount would be invested. However, if he makes quarterly deposits of Rs.1500, Rs.522 (about 9%) would be deducted. In addition, 0.056% of earlier years’ investments would also be deducted, however, the returns generated would be utilised for this purpose.

For higher amount of annual deposits, the percentage would significantly come down due the partly fixed nature of annual charges. Like, if investment is made for Rs.10000 per quarter, the total charges would be Rs.541 (about 1.5%).

Since there is a per transaction charge, it would be advisable to make only quarterly deposits. For a small investor who invests only the minimum amount, this may work out to be costlier than a normal mutual fund.

However, it offers a good option to easily switch from one fund manager to another and also from one security mix to another.