Nest Egg: Raising the equity cap

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Published: May 3, 2016 5:15:54 AM

Young private sector NPS subscribers may be allowed to invest up to 75% in equity for higher returns

Young investors of National Pension System (NPS) may have the option of investing up to 75% of their money in equity and the rest in corporate and government bonds. The pension fund regulator has also proposed harmonising the investment norms of government subscribers with that of private subscribers.

Taking a leaf out of the GN Bajpai committee report on review of investment guidelines for NPS submitted last year, Pension Fund Regulatory and Development Authority (PFRDA) has come out with two draft proposals. The first note proposes to increase the cap on equity investment to 75% from the current 50% through the life cycle fund. The second note proposes harmonising the investment norms of government subscribers with that of private subscribers.

The Bajpai report had suggested a shift away from the fixed income fixated investment pattern and allowing more play to pension fund managers in equity, as a part of the move to prudential investor regime.

At present, NPS provides life cycle fund option to its subscribers with equity allocation up to 35 years capped at 50%. The equity component falls with the increase in age of the subscriber and it becomes 10% when the subscriber is 55 years old. The pension regulator has now designed two more additional life cycle funds. The Aggressive Life Cycle Fund would have equity allocation of 75% up to the age of 35 years and will be 51% in age 41, come down to 26% when the subscriber turns 48 and 15% when he is 55 years old. The second one called as Conservative Life Cycle Fund where the equity allocation would be 25% up to the age of 35 years and come down to 5% by the time the subscriber is 55 years old.

In fact, the Bajpai panel had suggested that equity portion should be 100% after a 6-year window. It also pointed out that government employees need to be given the same flexibility as their private sector counterparts who are subscribers to the New Pension Scheme – as they are allowed only a 15% equity component and government employees are not allowed to use private sector fund managers. The panel’s simulation model shows a rejigging of portfolio from 10% equity + 50% government debt + 40% corporate debt to 50% equity + 25% each for corporate and government debt will increase the pension wealth by 46% after three decades. The panel had also suggested that alternative investments like real estate, commodities and infrastructure be added to the portfolio of choices.

For the private sector investors, NPS offers a lot of flexibility as subscribers can not only switch the funds among among equity, corporate bonds and government securities, they can also change their fund managers if they are not satisfied with the performance of the pension fund houses. Also, in order to make NPS more customer-friendly, the regulator has created an online platform called eNPS through NPS Trust to open a new account. Even existing subscribers can contribute money through the portal.

A subscriber can make online contribution through net banking, debit or credit card and the amount will be credited in the subscriber’s PRAN account on T + 2 basis (second day after the transaction). The eNPS facility cannot be used for enrollment under Atal Pension Yojana (APY). A subscriber can make initial and subsequent contribution to both Tier I as well as Tier II account from eNPS.

In the Budget of last two years, the government has given some important tax incentives. Last year, it allowed tax benefit on investment in NPS of up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C. In this year’s Budget, the finance minister has made withdrawals from NPS on maturity tax-free up to 40% of the total corpus accumulated. This was a major step towards making the NPS scheme more attractive and bringing it on par with the other EEE pension schemes like Employees’ Provident Fund and Public Provident Fund.

Also, subscribers of NPS Tier 1 account can now make partial withdrawal of up to 25% of contributions for certain specified circumstances after 10 years of being in the scheme. The partial withdrawal can be done for children’s higher education or marriage, construction or purchase of first house, and treatment of critical illness for self, spouse, children or dependent parents.

However, partial withdrawal won’t be allowed for buying a second property. A subscriber can withdraw from NPS only three times during the entire tenure and the gap between each withdrawal has to be at least five years. Partial withdrawal makes

NPS attractive as many investors stayed away from it because of  liquidity issues.

After retirement, a subscriber can withdraw 60% of the corpus and buy annuity from the rest 40% of the accumulated corpus.

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