Khota Paisa

The New Pension Scheme (NPS)

Posted in Retirement Planning by khotapaisa on February 5, 2010

If you are looking for market linked pension plan, you would typically consider various ULIP based pension plan. You would then be advised to select a low cost ULIP. But before you decide, consider the New Pension Scheme (NPS) launched a few months back. I would try to sumarize the NPS in short here so that you get a fair idea whether it makes sense for you or not.

Features :

  • Equity based pension plan with minimum 6000/- pa contribution.
  • Account can be opened at various banks & other contact centers.
  • Can select your equity exposure upto a max of 50%.
  • Type I and type II account available. Type II allows you to withdraw money anytime unlike type I. But a type I account is required for a type II account.
  • Available for everyone i.e. no bank account or PAN no. required.

What’s good :

  • A simple, no-nonsense pension plan for the masses.
  • Very-very low cost.
  • High level of customization available for investor.
  • Facility fo choose, change your fund manager.
  • Can use the same account throughout India.
  • One way transfer of money from type II account to type I account allowed.
  • Most investor friendly equity-linked product in market.

What’s bad :

  • Maximum equity exposure limited to 50% thus limiting your possible gains.
  • No pre-mature partial/full withdrawal facility.
  • On maturity (when your reach 60), you can withdraw a max. of 60% of your corpus. Rest must be used to buy annuity.
  • Maturity proceed (max 60% of corpus) is taxed on withdrawal.
  • No loan facility.

Overall, it’s a revolutionary product. At first, you may find various problems but most of them are designed to make it a pure pension plan (long term). Some of the major drawbacks include the tax treatment, though it is expected that in coming times this will be rectified. With introduction of type II accounts, the problem of no-withdrawal has been solved. Some may see the limit of 60% for withdrawal as a big problem but I guess it has been kept to prevent you from misusing (using it for anything other than retirement) your retirement fund. In theory this may not look good but, in practice, it is a boon for the investor. 
So if you have opted for NPS, you have selected the most investor friendly product in the market. If you have not, just wait for some time (a year or two) till the tax issue is resolved.

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31 Responses

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  1. Gregory Despain said, on March 5, 2010 at 6:27 am

    I just stumbled upon your Blog and found your post to be very thought provoking. I was wondering if you had a newsletter or feed or something I could subscribe to? I really enjoy your writing style and don’t want to miss any posts!

    • khotapaisa said, on March 5, 2010 at 6:50 pm

      You can subscribe to the blog using the link given on the blog.

  2. Purnendu Bagchi said, on April 21, 2010 at 8:42 pm

    Hi, is the minimum contribution for NPS Rs 6000.00 pm or pa?

    • khotapaisa said, on April 22, 2010 at 6:07 pm

      It is 6000/- per year. Thanx for the input, I have updated the post.

  3. Lokesh said, on June 9, 2010 at 6:24 pm

    Hi. I found a hard time in locating any bank where i cam open the NPS account. Tried with SBI but no success. Can you pls help me where i can open the NPS account.
    Also retirement at 60 yrs is little too much. Do you think this clause will also be relaxed to 50-55 soon.

    • khotapaisa said, on June 10, 2010 at 1:49 pm

      Hi Lokesh,
      Not all branches of SBI offer NPS service. So, you would need to check out with your branch as to which SBI branch in your city offers NPS service. You can also visit this link to find out the NPS service locations.
      As for age limit, it is fixed at 60 years and may not change as it is based on the retirement age of government /other jobs. But don’t worry about it even if you plan to retire at 55 or so. You would just need to plan for first 5 or so years.

  4. Lokesh said, on June 11, 2010 at 4:35 pm

    Thanks. I understand that NPS has not got a good responce because it was not marketed by agents. If a policy is not able to attract investments/accounts does it affect the NAV of the policy ?

    • khotapaisa said, on June 11, 2010 at 7:13 pm

      Hi Lokesh,
      As you rightly said, NPS is not popular because it was not sold properly. In the world of financial products, the products are generally sold, not bought.
      NAV is independent of no. of investors in the scheme.

  5. Lokesh said, on June 15, 2010 at 12:46 pm

    Thanks. One last ques. If i decide to invest say 2000 p.m. – can i increase/decreae the amount later.

    • khotapaisa said, on June 15, 2010 at 7:16 pm

      In NPS, you can fix the total yearly investment. This you can pay in multiple payments (any amount) as it suits you. But the yearly amount fixed can’t be changed. To overcome this, you can open TierII account as well & transfer money from tierII to TierI account whenever you like.

  6. vinod said, on June 23, 2010 at 1:07 pm

    I have the following investments

    1. 4.5 lacs in FDs
    2. 25000 yearly in the LIC life time gold (paid for three years)
    3. 24000 yearly in Max New York insurance growth plan (paid for 1.5 yaers)
    4. 25000 in SBI contra fund
    5. Jeewan kishore for my daughter cover Rs.5 lacs and premium 23000.00
    6. LIC endowment policy for Rs. 1.75 lacs
    7. PPF Rs. 70,000 Per annum
    8. Inv in NSC Rs.1,00,000.00
    9. In Saving Rs.1.50 lacs
    10. Mediclaim of Rs.3 acs (floater)
    11. My monthly income is Rs. 65000.00

    • khotapaisa said, on June 23, 2010 at 6:36 pm

      Hi Vinod,
      I am not sure what is your question. Your portfolio looks fine though a little risk averse. But not a problem. You need to do two things.
      1. Get protection for your family by getting term plan.
      2. Start investing thru SIP in equity funds.
      3. If you share my views, get rid of these Life time gold, Jeevan Kishore, Endowment policy and replace it with a child ULIP plan(given you child is not older than 5-7 years) and invest the rest.
      Note that this is a rough suggestion.

      • sanjay said, on June 24, 2010 at 2:58 pm

        Hi

        The info here is of great to all of us.
        I have a query about term plan. Kindly suggest which is best & low cost term plan for risk cover of 20 to 25 lakhs. And for how many years I should take this plan if I am at 40 at this point of time ?

        Thanks in advance.

        Sanjay

      • khotapaisa said, on June 24, 2010 at 10:34 pm

        Hi Sanjay,
        There is a link on this blog (under insurance section) on how to select term plan. i would recommend you have a look at it. As for duration of the plan, you take it till your retirement age at least.

  7. Lokesh said, on June 23, 2010 at 1:09 pm

    Hi, Thanks for your reply.
    – As there is not much info i can gather from banks can you pls advice what is the differeance in tier I and II a/c and which account should i open.
    – I am currentl investing 4000 pm in post office savings account. Do you think it will be worth to switch it from savings a/c to NPS in terms from long term returns.

    Lokesh

    • khotapaisa said, on June 23, 2010 at 6:26 pm

      Hi Lokesh,
      TierI account is locked until your retirement. You can’t withdraw from it. Tier II account is open for withdrawal as you may need. You can also transfer money from Tier II to Tier I account (not other way though). You must have a Tier I account to open a Tier II account.
      Whether you should switch this 4000/-pm to NPS depends on whether you are saving this money for retirement or some other purpose. If this money is for retirement, you should rather put it in NPS.

  8. Lokesh said, on June 23, 2010 at 1:14 pm

    Hi, This is Lokesh again.

    On a different note than NPS – You have earlier advised me to invest in diversifed MF.
    I came across Reliance growth fund. Have you reviewed its performance. Is it a good fund to invest?

    Sorry for so many questions.

    Thanks.

    • khotapaisa said, on June 23, 2010 at 6:30 pm

      Hi Lokesh,
      I am no mutual fund expert. But would say that Reliance growth fund is a good fund.

  9. Lokesh said, on June 24, 2010 at 4:53 pm

    Thanks for your reply. Your advice makes my decision so easy.

    Lokesh

  10. Lokesh said, on June 28, 2010 at 9:54 pm

    Hi Khotapaisa,

    Pls make a decision for me – Which fund manager should i choose for NPS.
    Since it a 30 yrs period should i choose a public sector bank?

    Lokesh

    • khotapaisa said, on June 29, 2010 at 8:20 am

      Hi Lokesh,
      Though there is not much data to support any particular fund manager’s choice, choice of fund manager will not make much difference as all would be investing as per Index only. So the return from all of them would be more or less same. If you feel comfortable with public sector bank, that’s fine. After all you should have a good night sleep after you have made investment. So select a public sector bank and start investing.

  11. Lokesh said, on June 29, 2010 at 11:39 am

    Hi, thanks for your reply.

  12. Lokesh said, on July 14, 2010 at 11:43 am

    Hi, I have opened a NPS a/c. Thanks for your advice.

    Pls advice if you have done the review of TATA AIG Maha Life Gold policy. Is it a good policy as it assures a return every year ?

    Thanks.

    • khotapaisa said, on July 14, 2010 at 3:34 pm

      Hi Lokesh,
      Good to see that you have opened NPS account. As for AIG MAHA Life Gold, I have not reviewed it. So I would need to look into to for details. As a thumb rule, it is not advisable to go for assured return schemes. So don’t consider these schemes unless you have very specific reason.

  13. Lokesh said, on July 15, 2010 at 10:28 am

    Thanks. I would like to share the below portfolio that i have made. Pls make the necessary additions/deletions in the same. The purpose is purely wealth creation and not tax saving.

    1) SBI magnum sector Contra fund, Growth option – Rs. 3000/month (enrolled in SIP for last 3 months)
    2) Reliance growth fund, Growth option – Rs. 3000/month (enrolled in SIP from last month)
    3) Birla Sunlife frontline enquity – would like to consider for 2000 pm
    4) HDFC Top 200 – would like to consider for 2000 pm
    5) Infrastructure bond of rs. 20,000 pa for tax saving

    Pls advice if this Mutual fund portfolio is good or you would like to delete or add some funds for wealth creation.

    In addition to this i am having 70,000 per annum in PPF and have started NPS of rs. 2000/ month. also have a LIC jeevan anand of 20,000 pa for last 6 years.

  14. Vinod said, on August 11, 2010 at 3:18 pm

    Hi,
    I contribute funds to my NPS account through Kotak Bank.
    I would now like to transfer the PoP to Citibank since now citibank which is my home bank has also been awarded as a PoP

    • khotapaisa said, on August 12, 2010 at 5:32 pm

      You can contact you current PoP for transfer of account.

  15. J. Singh said, on September 2, 2010 at 2:04 pm

    If i open NPS account now, and tax on withdrawal (of 60% at maturity) is removed after 2yr. Will it be applicable to me? coz you have mentioned to wait till that is done. Also will you suggest to have only NPS for my pension plans or i should have few other apart from NPS.

    • khotapaisa said, on September 2, 2010 at 9:10 pm

      You should not worry about tax changes. I suggested to wait because of impending changes expected. So can go ahead and open an account. As for anything other than NPS, I don’t think that would serve much purpose. You can though open NPS tier II account to give you withdrawal flexibility.

  16. Firoz alam said, on September 17, 2010 at 12:45 pm

    Futuregeneri total solution or reliance ulips invest 2000/month by Ecs or ppf which is better for long time 15-20years

  17. sanjay said, on November 29, 2010 at 10:02 am

    Greetings.

    Recently I have changed job. Pls suggest
    whether to withdraw my PF of previous company ?
    If I withdraw PF, will it be taxable ?
    Can I transfer PF to current PF account ?

    I have two earlier jobs PF accounts as it is i.e. I have not withdrawn or transfered that PF amount to anywhere.

    Pls suggest which is better option looking at all three PF + current PF account.

    Thanks in advance.

    Regards

    Sanjay


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