The year 2014 saw a big improvement in retirement savings options, whether it is the employee provident fund (EPF), the National Pension System (NPS) or mutual fund pension plans .
Employee Provident Fund (EPF)
The year proved to be a watershed with the Employee Provident Fund Organisation (EPFO) effecting many changes in the way the fund is managed.
Universal account number: The biggest reform was start of a process to allot a universal account number (UAN) to each member. This 'portable' number will give members greater control over their money. It is a big step towards shifting EPF services online.
Now, one will be able to handle one's EPF account like a bank account. For instance, one will be able to check the balance in the account and receive SMS alerts when contributions are credited into the account every month.
Transferring money during job change will be now a thing of the past. One will just have to furnish the UAN and KYC details to the new employer. After the employer verifies these, the money will get transferred to the new account.
Wage ceiling increased for EPF coverage: Now anyone with a monthly salary (Basic plus dearness allowance) of up to Rs 15,000 will have to be mandatorily covered by EPF. Others can opt out. Earlier, the limit was Rs 6,500. The new ceiling also applies to Employees' Pension Scheme and Employees' Deposit Linked Insurance Scheme (EDLI).
"The increased ceiling is expected to bring 50 lakh more employees under social security programmes. The new ceiling will also increase the benefit under the EDLI from a maximum of Rs 1,30,000 to Rs 3,60,000," says the EPFO. Minimum pension increased to Rs 1,000: This was a long-pending demand of trade unions as 32 lakh out of 49 lakh pensioners were getting less than Rs 1,000.
National Pension System
The Pension Fund Regulatory and Development Authority (PFRDA) Act was notified in February this year, necessitating changes in rules that govern the NPS. Some of the major changes are as follow:
Fund management charge lowered: In order to keep the overall costs low, the PFRDA reduced the fund management fee of the NPS from 0.25% to 0.01%. In fact, after the Act was notified, the PFRDA invited fresh bids from fund managers in which Reliance Pension Fund emerged as the lowest bidder with a quote of 0.01%. All other fund managers had to match the lowest bid.
Two fund managers-DSP BlackRock and Tata AMC-could not match the lowest bid and, hence, opted out.
R V Verma, member, PFRDA, says, "The mandate of the Act is to ensure minimum cost. The new fee has been decided based on a transparent bidding process. So, we expect all pension fund managers who are part of this system to manage funds at the cost they have agreed on."
Revision of investment guidelines: Private pension fund managers were asked not to invest directly in equities and instead invest only in index mutual funds or exchange-traded funds or ETFs. These index funds or ETFs should track either the Bombay Stock Exchange (BSE) Sensex or the National Stock Exchange (NSE) Nifty.
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The fund managers will have to choose the index they want to track in advance on a yearly basis. Earlier, fund managers could invest in shares of companies listed on the BSE or the NSE and on which derivatives are available or those that are part of the Sensex or the Nifty.
However, fund managers managing government employees' money can invest directly in shares of companies on which derivatives are available on the BSE and the NSE.
Mutual Fund Pension Plans
For long it was believed that mutual funds are an ideal retirement investment option. However, due to lack of tax incentives, they never became popular. There are just two retirement schemes-UTI Retirement Benefit Pension Fund and Templeton India Pension Fund--on which the government offer tax incentives. This may change now.
Nod to mutual fund pension plans: This year the Budget gave a go-ahead to mutual fund-linked retirement plans. Now, mutual fund retirement plans will get income tax benefit under Section 80 C of the Income Tax Act. A mutual fund house has to take approval from Central Board Direct Tax before launching such a plan. The funds will be locked-in till the investor turns 60.