Why the New Pension System / Scheme (NPS) has failed to take off? The main reason cited is the low awareness level. So here The Money Quest will try to make a sincere attempt to educate people about the actual working of New Pension Scheme (NPS). To start with, this post will throw a light on what makes this pension scheme unique.
NPS Comparison with existing retirement saving schemes
Unlike government sector, where employees are entitled to regular pension after their retirement, private sector employees have to make their own arrangement for meeting their income / expense need post-retirement.
Although Employees Provident Fund (EPF) & Public Provident Fund (PPF) are there, but both these schemes provide only lump sum withdrawal and chances remain high that after withdrawal, majority of the corpus might be frittered away due to lack of human self-control. The Employees Pension Scheme (EPS) 1995 under EPF provides a negligible pension and makes a mockery of the word ‘Pension’. At present, the only available pension option for private sector employees is to buy a deferred annuity plans from life insurance companies but the costs involved are too high.
In majority of cases, the EPF money doesn’t last till retirement because most people withdraw it while changing jobs and the lock-in period of PPF is also too low (just 16 years), as a result this money also get finished (to meet other life goals) even before reaching the stage of retirement.
On the other hand, under NPS, at the time of maturity, you’ll have to compulsorily buy a life annuity which will ensure a regular periodic income. Moreover, unlike assured returns provided by EPF & PPF, returns from NPS would vary depending upon the investment option chosen and the quality of the fund management. The best part is that it allows you to invest some part of your savings in stocks which definitely enhances the returns in the long term.
Current Worries
The major worry about this New Pension System is the differential tax treatment of EPF / PPF and NPS. But once Direct Tax Code (DTC) kicks in there will be a level playing field. Either PPF & EPF will come under EET regime or else NPS will also get EEE status. So it’s just a matter of time before the tax treatment is uniform.
The other worry is about the high administrative & record-keeping cost to be borne by the investor. To mitigate this concern, budget 2010 announced the annual subsidy of Rs 1,000 p.a. for 3 years in case of investors depositing not more Rs 12,000 p.a.
Other Benefits
Besides, there are so many other benefits associated with this pension scheme like flexibility, portability, transparency, lowest (almost negligible)fund management charges, switching facility and option to open a second account (TIER II Account) without any lock-in which makes NPS one of its kind and truly unique long term saving scheme not to be missed. The best part is that you can surely expect better returns than what you currently receive from EPF or PPF.
So, The Money Quest verdict is a thumping YES. Go and open an account right away. I’ll be writing more about this scheme over a period of next few months… stay tuned.
To know the detailed list of locations for opening NPS account click here.
Also see:
1. Impact of DTC on PPF
2. Is it worth investing in KVP?
3. What is the right time to buy a home?
NPS Comparison with existing retirement saving schemes
Unlike government sector, where employees are entitled to regular pension after their retirement, private sector employees have to make their own arrangement for meeting their income / expense need post-retirement.
Although Employees Provident Fund (EPF) & Public Provident Fund (PPF) are there, but both these schemes provide only lump sum withdrawal and chances remain high that after withdrawal, majority of the corpus might be frittered away due to lack of human self-control. The Employees Pension Scheme (EPS) 1995 under EPF provides a negligible pension and makes a mockery of the word ‘Pension’. At present, the only available pension option for private sector employees is to buy a deferred annuity plans from life insurance companies but the costs involved are too high.
In majority of cases, the EPF money doesn’t last till retirement because most people withdraw it while changing jobs and the lock-in period of PPF is also too low (just 16 years), as a result this money also get finished (to meet other life goals) even before reaching the stage of retirement.
On the other hand, under NPS, at the time of maturity, you’ll have to compulsorily buy a life annuity which will ensure a regular periodic income. Moreover, unlike assured returns provided by EPF & PPF, returns from NPS would vary depending upon the investment option chosen and the quality of the fund management. The best part is that it allows you to invest some part of your savings in stocks which definitely enhances the returns in the long term.
Current Worries
The major worry about this New Pension System is the differential tax treatment of EPF / PPF and NPS. But once Direct Tax Code (DTC) kicks in there will be a level playing field. Either PPF & EPF will come under EET regime or else NPS will also get EEE status. So it’s just a matter of time before the tax treatment is uniform.
The other worry is about the high administrative & record-keeping cost to be borne by the investor. To mitigate this concern, budget 2010 announced the annual subsidy of Rs 1,000 p.a. for 3 years in case of investors depositing not more Rs 12,000 p.a.
Other Benefits
Besides, there are so many other benefits associated with this pension scheme like flexibility, portability, transparency, lowest (almost negligible)fund management charges, switching facility and option to open a second account (TIER II Account) without any lock-in which makes NPS one of its kind and truly unique long term saving scheme not to be missed. The best part is that you can surely expect better returns than what you currently receive from EPF or PPF.
So, The Money Quest verdict is a thumping YES. Go and open an account right away. I’ll be writing more about this scheme over a period of next few months… stay tuned.
To know the detailed list of locations for opening NPS account click here.
Also see:
1. Impact of DTC on PPF
2. Is it worth investing in KVP?
3. What is the right time to buy a home?
