Why you should choose NPS for your retirement planning?

The National Pension System (NPS) is a voluntary, defined contribution pension-cum-investment scheme launched by the central government to provide income security to senior citizens.  

NPS was designed to enable subscribers to make optimum decisions regarding their future through systematic savings till they retire at the age of 60. NPS also seeks to inculcate the habit of disciplined investment to build a retirement corpus or pension wealth among the citizens.  

In a nutshell, it is an attempt to find a sustainable solution to the problem of providing adequate retirement income to every individual.  

Amit Sinha, Group Head – Social Security and Welfare, Protean eGov Technologies Limited, said, “Under NPS, individual contributions are pooled into a Pension fund which is invested by PFRDA (Pension Fund Regulatory and Development Authority) appointed professional Pension Fund managers (PFMs) as per the approved investment guidelines into diversified portfolios comprising of Equity, Government Securities and Corporate Bonds. These contributions would accumulate and grow over the years, depending on the returns earned on the investment made by the individual.” 

With the NPS in place, individuals can set their long-term and short-term goals through Tier-I (Pension account for long-term needs) and Tier-II (Investment account for short-term needs) accounts. “The NPS Tier-II account is optional, and individuals with an Active NPS Tier-I account are eligible for it. The current generation has also shown great inclination towards 'Systematic Investment Plans’ (SIP), where individuals are deducting a portion of their income monthly under SIP.  NPS has all the features and capabilities to offer what SIP stands for, whether it is the Tier-I or Tier-II account,” said Sinha. 

At the time of normal exit from NPS, the individual subscribers may use the accumulated pension wealth under their respective PRAN (Permanent Retirement Account Number) account to purchase a life annuity from a PFRDA empanelled insurance company apart from withdrawing a part of the accumulated pension wealth as a lump sum if they choose so. Further, under NPS, the investor can keep the amount invested right upto the age of 75 and also consider for systematic lump sum withdrawal (SLW).  

“The new feature mentioned above, i.e. Systematic Lumpsum Withdrawal (SLW), shall be introduced shortly, for the benefit of Subscribers at the time of exit, where the Subscribers have the option to take withdrawal proceeds in a phased manner and at different frequencies,” said Sinha. 

As for the investment limit under NPS, there is no maximum limit. However, Subscriber should contribute a minimum of Rs 1,000 per financial year for the account to be active. The tax benefits are available as per the prevailing tax rules.  

There are various NPS calculators available online. You can use them to calculate the retirement corpus. Sinha said, "The NPS calculator, i.e.  NPS Prosperity Planner,  typically requires inputs such as the individual's current age, date of joining NPS, Current NPS Corpus, Annual increase in contribution,  expected Inflation rate, and % of the amount to be annuitized. Based on these inputs, the calculator uses mathematical formulas to project the investment's potential growth and estimate the retirement corpus that may be accumulated. 

Pros of using an NPS calculator: It estimates the potential retirement corpus, helping individuals plan their savings and investment strategy. Secondly, it allows users to experiment with different contribution amounts, investment options, and retirement ages to understand the impact on their retirement savings.  

Cons of using an NPS calculator: The calculator's projections' accuracy depends on the inputs' accuracy and the assumptions about future returns. "The calculator's projections are based on assumed rates of return, which may not reflect the actual market performance. The actual returns can vary due to market fluctuations," said Sinha.