Something about New Pension System(NPS)

NPS is a new kind of investment cum retirement pension scheme where individuals during their work life would pool funds so as to provide financial security to them at the time after their retirement. The account holders would get a Permanent Retirement Account which can be accessed online or from Point of Presence(PoP's). A Central record keeping agency would maintain all the accounts as like a depository maintains demat accounts.
These funds would be divided into 3 Assets Classes viz. Equity(E),government securities(G) and Credit Risk(C) including corporate bonds and Fixed deposits that entail some risk. The motive behind is that these assets would provide long term capital appreciation. The govt. has appointed 6 Fund managers who will be able to access the resources for handling: SBI,ICICI Prudential.,UTI,Reliance Capital,IDFC and Kotak Mahindra.

For opening account one has to go to PoP which will be there at banks like SBI,South Indian Bank, Axis Bank, ICICI Bank,LIC,IDBI,Kotak Mahindra, OBC,Allahabad Bank and NBFC's like Reliance Capital,LIC,UTI AMC and IL&FS. One can keep the same account at time of switching of jobs or changing residence. Fund managers can also be changed. The equity component of the investment has been capped at a 50% of total savings.

Eligibilty- 18 to 55 years of age.

Contributions- Minimum of Rupees 6000 in one year and not more than rupees 500 at any time.

Payback options: If the subscriber is between age 60 to 70 then he or she will get 60% in lump sum or installments and remaining 40% has to be shifted to annuity. If the subscriber exits before 60 then he can take 1/5 in lump sum and rest has to be converted to Annuity( periodical pension payments) by shifting the money to Life Insurer.

Investment Options: For a person below 35 years of age half the investment would go to Equity since risk appetite is more. 1/5 into asset class G and rest into C. Above the age of 35 the default equity component decreases simultaneously. For age of 60 and above only 10% can be in equities and other 10% in corporate bonds while remaining 80% in govt. or State bonds.

Returns: Last year NPS was launched for IAS officers. The annual returns were around 14%

Tax Implications: At present NPS is coming under EET regime which means Tax Exempt at time of contribution, Exempt at time of Accumulation and taxable at time of withdrawal. But this did not go well with Pension Regulatory Authority and it has taken up the matter with Finance Ministry to provide equal status viz a viz investments like PPF, Post office schemes. Still the annuity portion is tax exempt.

Allocation Charges and other charges: Allocation charges are very low around .0009%. other costs like account opening, address change, Fund Manager Charges are around 400.

comparing it with MF its biggest advantage is low allocation charges and ability to choose various fund managers in same scheme.