The National Pension System (NPS) appears to be slowly and steadily emerging as a favoured retirement investment option of the country’s youth. Pension Fund Regulatory and Development Authority (PFRDA) Chairman Hemant Contractor in a tweet recently mentioned that 63.12 per cent corporate employees in the 26-35 years age-group joined NPS ‘voluntary’ in July 2016 compared to 46.38 per cent in June 2016.
While 63.12 per cent is a big number, what is actually striking is the age group that is opting for NPS, and that too, voluntarily. While investing in NPS is voluntary for the general public, for government employees the contributions are mandatorily deducted from their salary. This clearly points to the fact that India’s youth is getting more aware of long-term financial planning, including thinking of getting the act right on their financial requirements for the distant retirement years.
So, what could be attracting the country’s youth towards investing in NPS? What could be the clincher in its favour is that NPS, under the PFRDA regulatory framework, has the potential to provide high inflation-beating returns for old-age income compared to competing schemes aimed at providing a safety net at the time of retirement, such as the Employee’s Provident Fund (EPF) and the Public Provident Fund (PPF).
While EPF and PPF provide fixed annual returns as decided by the government, NPS provides the option of high equity exposure of up to 50 per cent of an individual’s investment. Since equities are a higher-risk higher-return game, the chances of building a bigger retirement corpus for the same amount of investment spread over the long term is much higher.
Equity investment, of course, carries market risks, but for a person in the age group of 26-35 should have higher risk-taking ability and many years left to retirement that would help to ride out the market cycles.
In some ways, PFRDA is being more progressive in its approach towards creating an old-age income security net than the EPFO where the equity investment component is capped at 5 per cent. Raising the cap to a higher level is becoming a sticky issue with strong opposition from the labour unions who have a big say in the Central Board of Trustees (CBT), the highest decision making body of the EPFO.
In fact, the PFRDA has mooted a new option of a life-cycle fund that would provide the option of equity investment going up to 75 per cent at age 35, to be progressively lowered as one ages.
There is also a high chance that by the time the 26-35 years old NPS subscribers reach retirement age, the scheme would be brought at par with EPF and PPF on taxation. Presently, unlike the two other schemes, which are exempt-exempt-exempt(EEE) from taxation at investment, accumulation and withdrawal stages, NPS is EET, where there is a tax incidence on withdrawal of 60 per cent of the accumulated corpus.
By opting for investing in NPS, Indian youth could emerge a winner in the long run.