P for Pension !! -- New Pension Scheme (NPS) , Swavalamban, Atal Pension Yojana -->> A bird's-eye view

What is NPS ?

• NPS is a social security benefit offered by the government to target the majority of population that does not have/does not receive pension benefits from its employer.

• It is a defined contribution scheme (unlike EPF, PPF where returns are guaranteed by the government) regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

• The investment in NPS is to be maintained until maturity/retirement. 

• Upon retirement, a part of your corpus will be allowed to be withdrawn as lump sum, and the balance will be mandatorily paid out as pension annuity.
   

Who is covered?

• Any individual between the age of 18 years and 55 years is covered. He could be a resident or a non-resident.

What is the mode of operation?

Step -1: 

• An individual needs to open an NPS account with one of the NPS’ distribution agents (banks, post offices etc.). 
• The individual will be offered 2 accounts – TIER I and TIER II; 


TIER I is mandatory for all individuals opening an NPS account. On opening an NPS account, the individual is issued a Permanent Retirement Account Number (PRAN). This number remains with the individual for his life, even if he changes jobs/location. He would also be able to transact online. 

Ok, but whats the difference between Tier I and Tier II accounts ? pehle Tier I ko vistaar se dekh lete hai ! The first account is called Tier 1 NPS Account, and the Tier 1 Account is mandatory for all central government employees. It is mandatory for them to contribute 10% of their basic salary plus DA plus DP every month towards this account, and the government matches this contribution. There are severe restrictions on how money can be withdrawn from the Tier 1 account, as it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before age 60. You can keep the remaining 20% with you. Even if you are not a government employee, you can still open a Tier 1 account, and if you are interested in NPS, you will need to open a Tier 1 account as that’s necessary in order to open a Tier 2 account, which I’ll come to in a moment.There is a minimum that you have to commit to investing in NPS, and for the Tier 1 account that minimum is Rs. 6,000 per year. phir Tier II account kya hai ? The Tier 2 NPS account is very similar to the Tier 1 account, and if you are not a government employee who wants to invest in NPS, you would want to invest the minimum of Rs. 6,000 in Tier 1 and then invest the rest of your money in the Tier 2 account. This is because Tier 2 is quite similar to Tier 1 in all respects except for the harsh withdrawal conditions. You are free to withdraw your money from the Tier 2 account any time that you want without any penalties. Minimum amount for opening Tier 2 account is Rs. 1,000 and minimum balance required at the end of the year is Rs. 2,000. You need to make at least 4 contributions in a year.

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Step-2: Once the account is opened, the individual can choose the mode of operation of his/her account – which is: manual or auto.

Under manual operation, he can choose the investment options as per his risk profile (alike a ULIP). There are 3 investment options – 

(a) equity. 

(b) debt – government securities.

(c) debt – non-government securities.
 
Under auto operation, the funds will be invested up to 50% in equity by default and the rest in debt. As maturity approaches, the funds are gradually switched to debt option in order to protect the fund from market fluctuations.
 
NPS provides flexibility to subscribers where they can switch their pension funds among the three options and change fund manager if not satisfied with their performance.

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Step-3: The contributions made on regular basis would grow and accumulate over the years, depending on the efficiency of the fund manager.
 

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Step-4: On maturity, the individual has a choice to withdraw up to 60 % of the pension fund; Balance 40% is paid out by way of monthly pension.

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What are the minimum and maximum investments in NPS?

The minimum investment is Rs 6000 per year. There is no upper limit on the maximum contribution per year. However, each transaction done through NPS attracts cost (Rs 10 currently).

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What kind of returns would the NPS generate?

• The returns would be higher than traditional debt investments (such as post-office schemes, bank deposits etc.) due to equity element in the investment. 
• However, the risk will be much lesser than equity-oriented mutual funds and returns generated by investing in direct equity. 
• This is because investment in equities is allowed through index funds and exposure to equity has been capped at 50%.

but yaar what is this index fund ? Thousands upon thousands of individual stocks are traded in the United States and around the world.  A number of so-called indexes have been set up to track how a particular part of the stock market - or the stock market as a whole - is doing.  There are indexes that track large-cap companies, small-cap companies, the entire stock market and so on.  One of the most common indexes is the Standard & Poor's 500, known as the S&P 500, which represents a broad cross section of 500 large American companies. What an index fund does is simple: It invests in the entire index. For example, an S&P 500 index fund buys all the stocks in the S&P 500 index. And that's it. (toh usase kya honga ? -- broad exposure milega , operating cost kum honga and obviously RISK ka element kum honga jo apna MAIN MOTIVE hai !! )

Advantages of NPS:

• Cost - NPS is the cheapest among current retirement products and defined contribution schemes; It is also easy to transact in NPS.

• Flexibility – The subscriber is given a PRAN, which will remain with him for forever. The account is portable irrespective of change in job/location.

• Returns - The returns would be higher than traditional debt investments (such as post-office schemes, bank deposits etc) due to equity element in the investment.

Disadvantages of NPS:

• Taxability - The contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lump sum would be taxable as per the individual’s tax slab. It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity) unlike EPF, PPF which are EEE (exempt, exempt, exempt).

• Comparison to mutual funds - Since the NPS is meant for retirement and financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds.

• Returns - If an individual is voluntarily investing in NPS, then he/ might as well invest in the stocks or mutual funds (MF). It is the tax benefits that would make NPS an edge above other pension products.

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But then why is NPS not popular ?

·         Because NPS offers very low Commission to Fund managers (ICICI, SBI, UTI etc.)

·         The commission for selling NPS schemes is just 0.25 per cent. 

·         So those players (ICICI, SBI) rather prefer to market their own pension, insurance, retirement plans rather than promoting NPS among their (regular) bank customers.

·         Same goes for financial advisor, insurance agents etc. They get more Commission by promoting pension/insurance/retirement plans of private companies to their clients compared to NPS.

Other reasons

·         In NPS, there are multiple actors: PFRDA, CRA and fund managers. NPS doesn’t offer uniform rate of return. Common people find this setup difficult and unsecure, unlike tried and trusted LIC or PPF.

·         Income Tax benefits under NPS are not significantly higher than the existing investment options.

·         NPS is not spending lot of money on ads with film stars / cricketers.

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Chalte Chalte ye bhi dekh lete hai Swavalamban kya tha ?

• This scheme is really for the financially less fortunate members of the society and is really a way for the government to incentivize investments for them.
• The government pays Rs. 1,000 every year for four years, if you open a NPS account under the Swavalamban scheme, but there are limitations on who can open an account under the Swavalamban scheme.   

Following conditions apply:

§          Subscriber is not covered under employer assisted retirement benefit scheme and also not covered by a social security schemes under any of the following laws:

§  Employee Provident Fund and Miscellaneous Provision Act, 1952

§  The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948

§  The Seamens Provident Fund Act, 1966

§  The Assam Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955

§  The Jammu & Kashmir Employee Provident Fund Act, 1961

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Lekin yaar MODI SARKAR ne toh ATAL PENSION YOJANA laayi thi na ....? woh kya hai phir ?

• Yes. Atal Pension Yojna was announced in Budget 2015-16 as an upgrade to the Swavalamban scheme, which will now fold into the new defined benefit pension scheme for the poor. Atal Pension Yojana (APY), will replace the previous government’s Swavalamban Yojana NPS Lite, which did not find much acceptance among people.

• The pension fund regulator will administer the scheme, which is open to all unorganized sector workers who currently do not avail of any social security scheme and have a bank account. 

Why this scheme? 

• To give clarity of future benefits to the subscribers—something that was missing in the Swavalamban scheme, says a government note. 

What is the product? 

• It is a pension-oriented savings product that gives a defined pension starting at age 60. 
• It can be boarded from age 18 to 40 and exit is at age 60. 
• The government will match half the contribution of the subscriber, or Rs.1,000, whichever is lower. 

• If the subscriber saves Rs.800 in a year, the government will put in Rs.400. If the subscriber saves Rs.2,000 in a year, the government will put in Rs.1,000. If the subscriber saves Rs.3,000 in a year, the government will put in Rs.1,000. 

• The monthly pension can be chosen from between Rs.1,000 a month, at intervals of Rs.1,000, and Rs.5,000 a month. 
• The subscriber will get the pension; on his death the spouse will get the pension, and when both die, the nominee gets the corpus back. 
• The annuity looks very much like the Jeevan Akshay plan from Life Insurance Corporation of India with the seventh option ticked.

Problems underlined by experts in Atal Pension Yojana ?

• One, the interest rate on the APY during the accumulation stage is 7.94 per cent a month. That is below the current bank deposit rate. 
• Two, at the withdrawal stage, the interest rate is insultingly low - just 7.06 per cent. This scheme is far worse than a bank recurring deposit scheme, even though the NPS will invest in higher-yielding products like corporate bonds and a bit in equities. 
• Three, a pension of Rs 1,000-5,000 a month after 20 years is unattractive. After 20 years Rs 5,000 will be worth just Rs 1,292, assuming an inflation of seven per cent. 
• Four, the average life expectancy in India is 67. It's worse among the poor. How long will someone enjoy his or her pension after 60?

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Ok, then what experts want Jaitley to do in coming Budget 2016-17

To make Atal Pension Yojana more ATTRACTIVE !!

• It must earn a higher rate of return, so that there is enough to go around for intermediaries as well as contributors. 
• This is possible by tweaking just one aspect: investing a larger part of the money in index stocks. 
• This, along with a sensible policy of allowing withdrawals and loans, exactly like the Public Provident Fund, may work better than a lock-in. 

To make NEW PENSION SCHEME more ATTRACTIVE !!

• If the government wants to encourage long-term equity investments, it must remove the anomalies and inconsistencies in the taxation of the National Pension System (NPS). 

• Right now, the scheme is treated as Exempt Exempt Tax (EET). This is at a sharp disadvantage to the other major retirement products such as the Employees Provident Fund (EPF) and the Public Provident Fund (PPF). It is high time that the NPS too is given the EEE status in order to encourage retirement savings.

• The basic problem with EET is that when an investor withdraws the corpus after retirement, he will be taxed on it. At least 40% of the corpus will have to be put into an annuity for a monthly pension. This pension will also be taxed as income.

The Kelkar report on tax reforms had recommended that all investments (NPS, EPF and PPF) should be EET. This was actually there in the first draft of the Direct Tax Code but obviously, it's politically impossible to start taxing EPF and PPF withdrawals.

• The other argument for taxing NPS was that it was a replacement for the existing system of pension for government employees, in which pension is just post-retirement income and is taxed like any other income. 
• But this argument is untenable. The legacy pension system may be like a post-retirement salary but the NPS is a defined contribution product where the investor gets returns earned by his investments. This is similar to the EPF and the PPF. 

• The Budget should, therefore, just make NPS completely exempt, which will level the playing field for all retirement products.