PFRDA allows anyone between the age 60 and 65 to join NPS and continue till age 70. But, does it help for someone above age 60 to make use of NPS?
National Pension System (NPS) is a market-linked deferred pension plan aimed to save money for one’s retirement. Anyone between 18 and 60 years can open an NPS account and start saving till retirement. However, the Pension Fund Regulatory and Development Authority (PFRDA) had some time back increased the maximum age of joining under NPS – Private Sector, i.e. under the All Citizen and Corporate Model from the existing 60 years to 65 years of age. It means anyone between 60 and 65 can now join NPS and continue till age 70. But, does it help for someone above age 60 to make use of NPS for retirement? Is NPS for a senior citizen or a retired taxpayer fruitful? Let us explore:
NPS beyond 60
For those joining after 60, the investments options and the pension fund manager etc remains the same. The normal exit will be after 3 years when the subscriber is allowed to withdraw a maximum of 60 per cent of the corpus while the balance 40 per cent will have to be compulsorily annuatized. It means the subscriber has to purchase pension or annuity from any of the life insurance companies using 40 per cent of the NPS corpus. In case, one decides to exit before completion of three years, only 20 per cent can be withdrawn while pension will be paid on the balance 80 per cent of the corpus.
When it comes to saving taxes, no other tax saving investment is as equipped as NPS. The contribution made in NPS not only qualifies for deduction under Section 80 CCD (1) up to a limit of Rs 1.5 lakh per a financial year but also it comes with additional tax benefit under section 80CCD(1B) up to Rs 50,000 a financial year.
The additional tax benefit under section 80CCD(1B) is the sweetener and several taxpayers go for it to further reduce the tax burden. This also stands to the advantage of the retired taxpayer or those working individuals above the age of 60.
Advantage Annuity Rates
For those joining NPS after the age of 60, the advantage is in terms of better annuity rates as compared to younger individuals. The annuity rates for someone age 65 is better than annuity rates for someone age 45.
NPS is a market-linked product with contributions exposed to equities and debt needs time to perform. Saving tax should not be the sole objective to invest in any tax saving investment. “I don’t think someone should open an NPS after 60 years of age. It is only in very rare cases that someone may be working beyond this age. If someone has 70 as retirement age, which is very rare, then it may make sense as there are ten years more from 60 for the person to invest and start getting the pension,” says Dr. Joseph Thomas, Head Research- Emkay Wealth Management.
NPS works better over the longer duration as equities have shown to outperform other asset classes over the long term.
Also, in NPS allocation to equities in more at a young age and then it tapers off as one age. The maximum allocation to equities in NPS is 75 per cent ( up to age 50) and comes down at higher ages. “Retirement corpus accumulation through NPS is not as good as in early stages of life. There is no benefit of locking the money at this stage of life ( post 60 years of age) as post-retirement income pay-out terms are not very flexible and tax efficient,” informs Milin Shah, Head, Product Development & Planning at HappynessFactory.in. Remember, annuity received is entirely taxable in the hands of the investor as per one’s tax slab, in the year of receipt.
Anyone joining NPS after age 60 should be clear on three things – One, till what age will he or she be contributing regularly in NPS? For a longer period, it helps else money gets locked-in with limited use. Secondly, opting for debt funds, both corporate and government securities with a speck of equity should help. But again, the holding period should be long for optimum results. Even debt can be volatile over short to medium term sometimes. Finally, do not treat NPS merely as a tax saving tool. “Post 50, it is better to keep money liquid and prefer investing in a diversified balanced fund, rather than locking money in NPS,” says Shah.