The decision by the Pension Fund Regulatory and Development Authority (PFRDA) to substantially ease the minimum contribution and minimum balance limits under the National Pension System (NPS) can be a major step in boosting inflows into pension funds for old age income security.
The pension regulator has decided to reduce the minimum annual contribution under Tier-I account from Rs 6,000 to Rs 1,000, while for Tier-II accounts it has decided to waive the requirement of maintaining minimum balance of Rs 2,000 at the end of the financial year and having at least Rs 250 per year.
NPS is just one of the scheme where the general public can invest for building a corpus for their retirement years. Hence, the barriers should be kept to the minimum to attract more people to consider investing in NPS. While lowering the limit, PFRDA must have considered that competing investment schemes such as the Public Provident Fund has a minimum annual investment limit of Rs 500.
The NPS is still in its early years. With the flexibility that the scheme offers for investing in equity, NPS could in the long run emerge as one of the most preferred investment options for creating long-term pension wealth. While the present cap of equity investment under the scheme in the most aggressive option is 50 per cent, PFRDA is considering including a new life-cycle fund where the equity component can go up to 75 per cent. In comparison, the Employees’ Provident Fund (EPF) limits equity exposure to 5 per cent, while PPF stays from equity.
The move by PFRDA to unfreeze all account that were frozen due to the earlier minimum investment restrictions as a one-time measure is also a welcome step. It would allow many investors who could not spare Rs 6,000 annually and are willing to set aside for a lower amount for NPS to have a re-look at the investment option and resume investing for their old-age income security.
In fact, PFRDA has urged people to make as much contribution as possible to the NPS to create a meaningful corpus for post-retirement years. “Even though the minimum balance requirement has been reduced subscribers are advised to contribute to their Permanent Retirement Account Number (PRAN) account as much as possible to get a decent pension and live a dignified life post retirement,” PFRDA has said.
With the safety net for old age income security virtually non-existent in India, measures that ease saving for old age will always be welcome. This is especially because NPS is open for the unorganised sector who do not have the benefit of mandatory contribution to EPF, which helps in creating a corpus for later years.