If you are looking at building your retirement corpus, you can consider the New Pension System (NPS). Launched by the Indian government, the Tier-I scheme offered by NPS is a pension scheme that allows investors to choose their own investment options and pension fund managers.
Open to anyone between 18 and 55 years, a minimum of Rs 6,000 needs to be invested every year, until heshe turns 60. At maturity (60 years), investors would be required to invest a minimum of 40 per cent of the accumulated amount to purchase a life annuity. The remaining can be withdrawn in a lump sum or in a phased manner.
Investing Rs 6,000 every year at a 12 per cent interest rate, for the maximum term of 37 years, one would have collected a corpus of over Rs 3.65 crore. However, these returns are not guaranteed and depend on how the pension fund you choose (out of the designated seven) actually performs. Like any other pension scheme, NPS invests in government and other debt products. Its equity investments will be capped at 50 per cent.
At present, there aren’t many pension products to choose from. Besides the Public Provident Fund (PPF), there are just a couple of plans in the mutual fund and the unit-linked insurance pension products segment. Most insurance companies have pulled out their unit-linked products after the Insurance Regulatory Development Authority (Irda) came up with a 4.5 per cent guaranteed returns mandate. However, the traditional retirement plans offered by insurance companies remain a good option with their built-in guarantees, and option for loans against the cash value of the policy.
While PPF remains a popular investment avenue, the restriction of investing Rs 70,000 every year works against it. There is no upper limit for investment in NPS and others.
However, it is with regard to fund management charges (FMC) that NPS really scores. While FMC for NPS is a mere 0.0009 per cent or 90 paise a lakh, it is one per cent or Rs 1,000 per lakh in case of mutual funds. Insurance companies charge up to 1.35 per cent or Rs 1,350 per lakh.
Many believe that the long lock-in period for the pension scheme works against NPS. PPFs and other existing pension plans that allow partial withdrawals are far more liquid. At present, all annuities coming out of pension products are taxable as income. It will be the same in case of NPS, too. Even in terms of tax benefits, tax free PPFs may be a better option than NPS, which at 12 per cent may not give attractive post-tax returns.