If you are looking to save for your retirement, the National Pension System (NPS) along with other investment options may be considered. NPS is essentially a long-term investment scheme to help one direct his or her savings towards retirement.
How NPS works
After opening an account, you keep contributing till age 60 or till the scheme’s maturity. At age 60, called the vesting age, you can withdraw a maximum of 60% (tax-free) of the accumulated corpus, while the balance is to be handed over to a life insurance company to buy an annuity. You have different pension options to choose from, including pension for lifetime, but the annuity or the pension received is fully taxable in the year of receipt.
Now, let us see what are the fund options available in NPS to grow your money. NPS offers a choice to allocate your money among equity (index stocks), debt (corporate, state government and central government bonds) or a mix of both. Depending on your risk profile and the number of years left to retire, you may choose a mix of fund options, thus allocating your NPS contributions across equity and debt. You can also choose between ‘active choice’ and ‘auto choice’, depending on how comfortable you are in managing your investments. The maximum equity exposure in NPS has been restricted to 75% of contributions for private sector subscribers.
The fund options available in NPS are similar to the structure of mutual funds. NPS does not offer a fixed rate of return and instead is a market linked financial instrument. Since inception, various NPS schemes have generated 9-12.7% return, while over the last five-year period, the returns are in the range of 8.1-13.3% (as on March 31, 2022).
Illustratively, if a 30-year-old contributes Rs 15,000 a month in NPS, the corpus at age 60 grows to Rs 3.4 crore at an assumed annualised return of 10% . If the NPS subscriber chooses to get annuity on the entire corpus, then at an assumed rate of 6% per annum, the monthly pension amount comes to about Rs 1.7 lakh.
Using an NPS calculator, one can decide how much to save after taking inflation into account and accordingly plan for pension. NPS along with your other investments including equity mutual funds, PPF, EPF can help build a sizeable retirement kitty.
NPS suits someone who is not very comfortable in choosing the right investment options available in the market. By using NPS as an investment option to save for retirement, one not only inculcates a habit of savings but also ensures a steady source of retirement income especially at a time when life expectancy is increasing.
Overall, NPS has a plethora of options—from choosing the fund options, how you want to manage contributions, which pension fund manager you want, which annuity provided you want to which pension option you wish to opt for. But, NPS being a long-term investment has a not-so-friendly option to exit mid-way. So, understand the features, working and the life-cycle of the scheme before opening and contributing to the NPS account. Once familiar with the features and the fund options, you can optimise your NPS account to make it work for you for a lifetime. Knowing them will ensure you make the most of your NPS account for your golden years.