Make haste slowly

The new voluntary pension plan is set to open for subscription to all citizens from 1 April. We look at the nuances of this scheme, how it will work and what you should watch out for.

Mukul Asherand Narayan Krishnamurthy | Print Edition: March 19, 2009

It is well known that India has very little by way of social security. The Employees’ Provident Fund (EPF) serves a minority of the population, and even that does not provide a big enough retirement nest egg. Which is why the news about a universal voluntary pension scheme generated so much interest when it was first mooted. The New Pension Scheme (NPS) will be launched on 1 April this year by the Pension Fund Regulatory and Development Authority (PFRDA) and will be open to all citizens.

Consider the statisticsthe number of people above 60 years of age is expected to grow from 88 million in 2005 to 100 million in 2010, and to 330 million by 2050. Estimates are that an Indian reaching the age of 60 today can expect to live for 20 years, with women outliving men by three-four years. The life expectancy will only increase in the future. So each person will require support for a longer period, needing more resources. There are no two thoughts on the need for a voluntary pension scheme. Considering the limited choice in long-term pensions, this could be one scheme that can change the retirement landscape.

On the face of it, there seems little reason for you not to join this scheme; after all, there’s no such thing as too much security. This is a government-backed offering, so it’s bound to be safe. Enter, but do so with your eyes open. This is a new scheme with issues that are not fully resolved, and some matters that could be of concern. We take a look at the features of the scheme as we know it and examine the options open to those of us who want to ensure that our retirement does not bring along a host of financial worries.

What the new scheme is
Although it has not been specifically described as one, the NPS is a defined contribution scheme, which will allow members to make contributions to their individual retirement accounts (IRAs). This amount is invested during the accumulation phase, providing members the best opportunity to benefit from the power of compound interest and the fund options that are available. The members who are not sure of their risk appetite, or those who cannot decide upon a fund option, can stick with the default option, which works on the life-stage principle of higher proportion in equities in the early years, tapering down as the member gets older. The fund options will be reviewed every three years and new options may be introduced over time.

After retirement, which is the payout phase, a certain proportion can be withdrawn as a lump sum and the balance must be compulsorily invested in annuities that give a domesregular income to the individual. This regular income received by the individual is the pension.

Wide Choices
The NPS will offer investors a wide variety of funds to choose from. One can opt for the fund that suits his risk and age profile.
NPS Fact file

Minimum investment: Rs 6,000

Modes of payment: Quarterly, half-yearly and annual.
Investment options: Equities, corporate bonds and govt bonds. Investors can choose the mix.
Default option or auto choice: Up to 35 years, equity exposure will be 65%; thereafter every year this will fall by 10% till the investor reaches 60
Charges: Registration charge of Rs 40; transaction fee of Rs 20; switch charge of Rs 10; annual CRA fee of Rs 350.
Fund management fee: 0.09 basis or 0.0009%.

Fund managers:
PSUs: UTI Retirement Solutions, SBI Pension Funds and IDFC Asset Management.
Private: Reliance Capital Asset Mgmt, ICICI Prudential Life Insurance and Kotak Asset Mgmt.

PFRDA will provide a three-year licence to the pension fund managers and it is for the NPS contributor to choose the fund manager

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