Unlocking retirement prosperity: How NPS remains cutting-edge

The most prominent reason for its increased awareness and popularity is the consistency in investment returns and cost-effectiveness. The NPS has consistently delivered superior returns compared to alternative products and inflation, with equity schemes generating approximately 12.8% per annum and debt schemes around 9% per annum over the last 10 years. This can be compared with current interest rates of EPF at 8.15%, PPF at 7.1%, and various small saving schemes ranging from 6.7% and 7.7%.

It is worth noting that NPS continues to evolve and improve through subscriber-friendly measures introduced by the Pension Fund Regulatory and Development Authority (PFRDA).

Systematic lump sum withdrawal: The PFRDA recently introduced systematic lump sum withdrawal (SLW) which is a case in point. Under the SLW mechanism, the 60% tax-free lump-sum portion of the maturity corpus can be withdrawn in monthly, quarterly, half-yearly or annual instalments for the period between retirement and attaining the age of 75 years. This allows the corpus to remain invested and grow. It also reduces the risk that the corpus may be prematurely exhausted after a lumpsum withdrawal. Moreover, it enables the subscriber to postpone purchasing an annuity from the remaining 40% of the corpus, which means that the subscriber will get a better annuity rate, as annuity rates increase with the age of the subscriber. Annuity is an essential feature of a pension product, as a lifetime annuity transfers the longevity risk to the insurance company. Other recent improvements made in the past include increasing the entry age to 70 years, allowing 100% equity in tier II account, liberalising scheme preference change and premature exit, etc.

Enhanced flexibility: Another significant recent development is that subscribers are now allowed to choose different pension fund managers for each asset class, i.e. equities, corporate bonds, and government securities. It means subscribers can evaluate the performance of fund managers for each asset class separately and allocate their corpus to selected fund managers accordingly. Moreover, there is no cost associated with switching between asset classes (four times a year) or between fund managers (once a year). Comparative returns of pension fund managers can be found on the website of the NPS Trust at https://www.npstrust.org.in/weekly-snapshot-nps-schemes

Guaranteed returns scheme: For subscribers looking for a certain element of guarantee in their retirement savings, the regulator is in the process of designing a guaranteed returns feature within NPS. This will be an optional feature and may be attractive to risk-averse subscribers or as an alternative product to subscribers nearing retirement.

Optimizing tax benefits: The NPS continues to retain tax benefits. With regard to the new tax regime under which the taxpayer is eligible for lower tax rates in exchange for giving up some exemptions, it is important to note that taxpayers still have an option of choosing the old regime and claiming the exclusive ₹50,000 tax exemption under section 80CCD(1B) available for NPS, over and above the ₹1.5 lakh available under section 80C. Subscribers may look at spreading this amount over three to six months rather than a single transaction near the end of the financial year. Even for taxpayers who opt for the new tax regime, employers’ contribution to NPS up to 10% of salary is still tax-exempt under section 80 CCD (2) with a cap of ₹7.5 lakh per annum.

While tax benefits in the product are indeed most attractive, investors must go beyond tax benefits and understand the need for building a sizeable corpus and how NPS assists in this journey with a host of other unique features like flexibility of asset allocation, easy contributions through SIP feature, portability of the account across employers and locations, and digital processes. Lock-in and annuity are essential features of a retirement product. Investors need to allocate their savings into short-term, medium-term and retirement needs, and the retirement portion must be locked in for the long term so that it is not used up for intermediate goals. Lock-in is therefore a critical feature of a retirement savings product, from the perspective of both ensuring the end use as well as the power of compounding. Having said that, the product does have a feature of partial premature withdrawals.

Shyamsundar Baliga is chief executive officer, Kotak Mahindra Pension Fund.