National Pension System (NPS) is a Pension Fund Regulatory and Development Authority (PFRDA) initiative focused towards retirement savings. An NPS account will not only let you make regular savings during your job tenure, but will also help you build a healthy corpus for your retirement and let you enjoy a regular income in the form of pensions and lump sum withdrawals on retirement.
NPS has been designed primarily to meet the following objectives:
• Provide retirement income
• Give market based return over the long term
• Extend old age security coverage to all citizens
In addition to providing a range of investment options to subscribers, NPS allows individuals to decide where their pension fund should be invested.
On completion of registration formalities, a subscriber receives a PRAN Kit containing a Permanent Retirement Account Number (PRAN) card, subscriber details (or subscriber master list) and an information booklet. To activate and contribute to the Tier II account, a subscriber has to submit a copy of his PRAN card.
NPS is based on a unique Permanent Retirement Account Number (PRAN) which is allotted to each subscriber upon opening an NPS account.
Any individual between 18 to 65 years of age, who is a citizen of India, is eligible to subscribe to NPS.
How does it work?
The NPS Scheme offers 2 types of account
1. Tier I account – Also known as the Pension Account, is mandatory in order to join NPS and is available to all citizens starting May 1, 2009. In this account you need to contribute your savings (may include employer’s contribution in case of corporate sector) for retirement into a non-withdrawal account.
The minimum mandatory contribution in a Tier I account is 1,000 per financial year. There is no cap on the maximum contribution towards this account. Tier I, also known as a pension account, is a non-withdrawable account, which means this account can be withdrawn only on meeting exit conditions prescribed by PFRDA.
2. Tier II accountThis is a voluntary savings account which offers anytime withdrawal facility. Minimum contribution required to open a Tier II account is
1,000. Tier II, also known as the investment account, gives you the flexibility
to invest anytime. However, to open a Tier II account you must have an active
Tier I account. You can open a Tier II account along with Tier I account or any
time after opening Tier I account.
Unlike Tier I account, there is no tax benefit towards investments made in Tier II account.
Fund options
A National Pension System account offers you investment options across four different asset classes, namely:
1. Equity (Asset Class E)
2. Corporate Bonds (Asset Class C)
3. Government Securities (Asset Class G)
4. Alternative investments (Asset Class A)
Based on your risk appetite, with NPS you get the flexibility to decide what percentage of your investment should be allotted to which asset class. Once invested in NPS, you can change your investment mix twice every financial year.
Investment Options
NPS offers you two investment options to get the right mix of your assets. They are:
1. Active Choice – Lets you decide the ratio of your contribution to be allocated among the four asset classes i.e.
• Asset Class E - investments in equity market instruments
• Asset Class C - investments in fixed income instruments other than Government Securities
• Asset Class G - Investments in Government Securities
• Asset Class A- Investments in Real Estate based securities
2. Auto Choice – Under auto choice, PFRDA has predefined allocation across the three asset classes based on an individual’s age. The allocations therefore change with the age of the subscriber with higher contributions to safer assets i.e. Government Securities, in the later years. This is also known as Life Cycle Fund option. This age-wise investment pattern under Auto choice is better explained in the table below:
The maximum asset allocation allowed under Equity (Asset Class E) is 50%. The
maximum asset allocation allowed under Alternative Investments(Asset Class A) is
5%. However, an individual can choose to invest 100% of his corpus/contribution
in Asset Class C and/or Asset Class G.
Aggressive Life Cycle Fund (LC 75)
Under the aggressive life cycle fund, the exposure to equity (E) is 75% upto the age of 35 and gradually goes down to 15% by the time you turn 55. Subsequently, the allocation stays the same till such time you exit NPS.
Moderate Life Cycle Fund (LC 50)
Under the aggressive life cycle fund, the exposure to equity (E) is 50% upto the age of 35 and gradually goes down to 10% by the time you turn 55. Subsequently, the allocation stays the same till such time you exit NPS.
Conservative Life Cycle Fund (LC 25)
Under the Conservative life cycle fund, the exposure to equity (E) is 25% upto the age of 35 and gradually goes down to 5% by the time you turn 55. Subsequently, the allocation stays the same till such time you exit NPS. Clearly, Conservative Life Cycle Fund is for risk averse investors.
| Percentage Allocation to Different Asset Classes |
Moderate Life Cycle Fund (Existing) LC-50 |
Aggressive Life Cycle Fund LC-75 |
Conservative Life Cycle Fund LC-25 |
| Age
|
Equity (E)
|
Corp Bonds (C) |
Govt Bonds (G) |
Equity (E)
|
Corp Bonds (C) |
Govt Bonds (G) |
Equity (E)
|
Corp Bonds (C) |
Govt Bonds (G) |
| Upto 35 years
|
50%
|
25% |
25% |
75% |
10% |
15%
|
25% |
45% |
30% |
| 36
|
48%
|
26% |
26% |
71% |
11% |
18%
|
24% |
43% |
33% |
| 37
|
46%
|
27% |
27% |
67%
|
12% |
21% |
23%
|
41% |
36% |
| 38
|
44%
|
28% |
28% |
63%
|
13% |
24% |
22%
|
39% |
39% |
| 39
|
42%
|
29% |
29% |
59%
|
14% |
27% |
21%
|
37% |
42% |
| 40 |
40%
|
30%
|
30% |
55% |
15%
|
30% |
20% |
35%
|
45% |
| 41
|
38%
|
31% |
31% |
51%
|
16% |
33% |
19%
|
33% |
48% |
| 42
|
36%
|
32% |
32% |
47%
|
17% |
36% |
18%
|
31% |
51% |
| 43
|
34%
|
33% |
33% |
43%
|
18% |
39% |
17%
|
29% |
54% |
| 44
|
32%
|
34% |
34% |
39%
|
19% |
42% |
16%
|
27% |
57% |
| 45
|
30%
|
35% |
35% |
35%
|
20% |
45% |
15%
|
27% |
57% |
| 46
|
28%
|
36% |
36% |
32%
|
20% |
48% |
14%
|
23% |
63% |
| 47
|
26%
|
37% |
37% |
29%
|
50% |
51% |
13%
|
21% |
66% |
| 48
|
24%
| 38% |
38% |
26%
|
20% |
54% |
12%
|
19% |
69% |
| 49
|
22%
|
39% |
39% |
23%
|
20% |
57% |
11%
|
17% |
72% |
| 50
|
20%
|
40% |
40% |
20%
|
20% |
60% |
10%
|
15% |
75% |
| 51
|
18%
|
41% |
41% |
19%
|
18% |
63% |
9%
|
13% |
78% |
| 52
|
16%
|
42% |
42% |
18%
|
16% |
66% |
8%
|
11% |
81% |
| 53
|
14%
|
43% |
43% |
17%
|
14% |
69% |
7%
|
9% |
84% |
| 54
|
12%
|
44% |
44% |
16%
|
12% |
72% |
6%
|
7% |
87% |
| 55
|
10%
|
45% |
45% |
15%
|
10% |
75% |
5%
|
5% |
90% |
| 55 and beyond
|
10%
|
45% |
45% |
15%
|
10% |
75% |
5%
|
5% |
90% |
Realignment of portfolio is system driven and is executed on date of birth of the subscriber
List of Pension Fund Managers:
• ICICI Prudential Pension Fund Management Company Ltd.
• Kotak Mahindra Pension Fund Ltd.
• Reliance Capital Pension Fund Ltd.
• SBI Pension Funds Ltd.
• UTI Retirement Solutions Ltd.
• LIC Pension Fund Ltd.
• HDFC Pension Management Company Ltd
• Birla Sun Life Pension Management.
Withdrawal Information and
Withdrawal options available in NPS account are:
| Vesting Criteria |
Benefits |
| On attaining 60 Yrs
|
• Max. 60 % of the pension wealth can be withdrawn in lump sum
• Alternatively subscriber can withdraw in maximum 10 annual installments up to the age of 70 yrs
• Min. 40% of pension wealth to be compulsorily used to purchase annuity. |
| Anytime before the age of 60 Yrs |
• Max. 20% of the pension wealth can be withdrawn in lump sum
• Min. 80% of the pension wealth to be compulsorily used to purchase annuity
|
| Death due to any cause |
• Nominee receives 100% of the pension wealth
• If nominee wishes he/she can subscribe to NPS individually
|
When invested in NPS, there is a possibility that post retirement you may not wish (or need) to withdraw lump sum of your investment (or purchase annuity) as per criteria mentioned in the table. Therefore, NPS offers you some exceptions, these being:
Deferment option (applicable only for exit from NPS at age of 60 years)
• Subscriber can defer the lump sum withdrawal for up to 10 years
• Subscriber can defer the annuity purchase for up to 3 years
Partial Withdrawals:
Partial withdrawal upto 25% of the individual’s contribution can be made provided the subscriber has been in NPS for a period of 3 years from the date of joining. Partial withdrawals from NPS are tax free. Purposes for which partial withdrawal is allowed –
• Children’s higher education
• Children’s marriage
• Purchase or construction of a house
• Treatment of specified illnesses
Death Benefit:
• On death of the Subscriber, Nominee/Legal heir can claim the entire Corpus.
Annuity Service Providers:
On exit from NPS, certain portion of the amount has to be invested in an Annuity. At present, below mentioned 5 life insurance companies are registered with PFRDA to offer annuity plans to NPS subscribers:
• HDFC Life Insurance Company Limited
• ICICI Prudential Life Insurance Company Limited
• SBI Life Insurance Company Limited
• Star Union Dai-Ichi Life Insurance Company Limited
• Life Insurance Corporation of India Limited
Annuity Schemes:
Depending on the need, a subscriber can select any of the below mentioned annuity plan offered by Annuity Service Providers registered with PFRDA
• Annuity payable for life at a uniform rate to the annuitant only
• Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive
• Annuity for life with return of purchase price on death of the annuitant (Policyholder)
• Annuity payable for life increasing at a simple rate of 3% p.a
• Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.