All About NPS (New Pension Scheme)

What is NPS
It is a system where individuals fund, during their work life, their financial security
for old age when they no longer work. All those who join up would get a Permanent
Retirement Account (PRA), which can be accessed online and through so-called
points of presence (PoPs).
This is the lowest cost self financing Social Security tool. Annual record keeping as
well as fund management charges are lowest than any other investment options.
This is the first time that govt has come up with any scheme where you have got the
option to take benefit of equities investment which can increase your wealth like
geometric progression though it might be risky
A central record keeping agency will maintain all the accounts, just like a depository
maintainsdemat accounts for shares. Six different pension fund managers (PFMs)
would share this common CRA infrastructure. The PFMs would invest the savings
people put into their PRAs, investing them in three asset classes, equity (E),
government securities (G)and debt instruments that entail credit risk (C), including
corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the
efficiency of the fund manager. The NPS in this form has been availed of by civil
servants for the past one year. Subscribers can retain their PRAs when they change
jobs or residence, and even change their fund managers and the allocation of
investments among the different asset classes, although exposure to equity has been
capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These
are run by 17 banks SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad
Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank
of India and four other financial entities, LIC, IL&FS, UTI Asset Management and
Reliance Capital. A subscriber can shift his pension account from one PoP to another.
Subscribers can choose from six fund managers ICICI Prudential, IDFC, Kotak
Mahindra, Reliance Capital, SBI and UTI.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a
year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?

If the subscriber exits the scheme before the age of 60, s/he may keep
one fifth of the accumulated saving and invest the rest in annuities
offered by insurance companies. An annuity transforms a lump sum spent on
buying the annuity into a steady stream of payments for the rest of the annuity
holders life. Now, how long an annuity buyer would live is something that takes a life
insurance companys expertise to compute and that is how they come into the
picture. Insurance companies offer flexible investment and payment options on
annuities. A person who exits NPS when his age is between 60 and 70 has
to use 40% of the corpus to buy an annuity and can take the rest of the
money out in one go or in instalments. If a subscriber dies, the nominee
has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal.
The NPS was devised when the government was planning to move all long term
savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at
the time of contribution, exempt during the period when the investment accumulates
and taxed at the time of withdrawal. So, NPS comes under the tax regime EET.
However, the government could not muster the political courage to change the
taxation regime of EET on several saving schemes. So, the pension fund regulator has
taken up with the finance ministry the need to remove the asymmetry in tax
treatment between the NPS and other schemes such as the PPF. In any case, the
amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes
for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E,
one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the
default proportion going to equities would come down and the proportion going to
government securities, go up. By the age of 60, these investments will gradually be
adjusted so that only one-tenth remains in equities, another one-tenth in corporate
bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit
flexible withdrawals as are possible in the case of mutual funds. Fund management
charges are ridiculously low (0.0009% a year), as compared with mutual funds. The
cost of opening and maintaining a permanent retirement account, and the
transaction charge on changing address, pension fund manager, etc are around Rs
400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the
first one in which it operated, handling the corpus of civil service pensions

To make the New Pension System (NPS) more attractive, PFRDA (Pension Fund
Regulatory and Development Authority) has introduced the concept of Tier-2
account. This is to provide for withdrawals to meet financial contingencies.
Opening the Tier-1 account is compulsory for everyone opting for NPS.
However, the Tier-2 account is optional for the investors, as it is a
voluntary savings account from which the investor can withdraw money,
any time and any number of times.
The Tier-2 enables people build savings through investments over and above those in
the Tier 1 pension account. Only those having an active Tier 1 account can open the
Tier 2 account. The best part is that now both Tier 1 and Tier 2 account can be
opened simultaneously with just Rs 1500/-. Withdrawal from Tier-2 account can be
done freely anytime and it acts actually a cheap mutual fund where you would be
paying Fund Management Charges of just .005% compared to 1.5% in Balanced
Mutual Fund.
Considering the recent changes done by SEBI in Life insurance Pension plan where
life cover is made mandatory and no withdrawal is allowed (Full or Partial), it makes
more sense to opt for NPS (New Pension Scheme) as charges in this are thousand
times lesser than Pension Plan from Life insurance companies.
The Central Record-keeping Agency (CRA) will not levy additional
maintenance charges on the Tier 2 accounts, other than the nominal Rs.
10 for each transaction, as is the case with Tier 1 account. Investors can
choose separate fund managers, separate pattern of investment and
appoint separate set of nominees. If one wishes, he/she can transfer
money easily from Tier 2 to Tier 1 account too
Minimum amount for opening Tier 2 account is Rs. 1,000. Minimum remittance is
Rs. 250 and minimum balance at the end of a financial year is Rs. 2,000. Minimum
number of contributions in a year is four. The Tier 2 savings can be added to pension
corpus at the time of retirement to increase monthly pension.

Who are the PFMs under NPS?

LIC Pension Fund Limited
SBI Pension Funds Pvt. Limited
UTI Retirement Solutions Limited
IDFC Pension Fund Management Co. Limited
ICICI Prudential Pension Funds Management Co. Limited
Kotak Mahindra Pension Fund Limited
Reliance Capital Pension Fund Limited