BENGALURU: While a majority of people postpone retirement planning in the midst of education, house loans and insurance plans, financial experts say it should be done within a few months of entering the workforce.
One has to plan for a retirement early so as to lead a stress-free life after retirement, and the focus should be more on growing money, considering retirement. Of the many investment options, the National Pension System (NPS) has become the preferred choice these days for retirement planning.
“The National Pension System is an effective retirement planning avenue. Apart from the tax breaks, it offers options to invest dynamically across asset classes along with availing the benefits of an annuity post-retirement,” says Nirav Karkera, Head Research, Fisdom.
Investors can choose from eight fund managers to manage their corpus. What is important, is to align the asset allocation among equities, corporate bonds and government securities in line with overall portfolio strategy for retirement as a financial goal.
It is imperative that one plans the allocation to NPS considering the annuity nature of income and restrictions around full redemption, as applicable. NPS schemes offer the flexibility to decide allocation to each asset class. It is necessary to select a fund manager that has distinct and demonstrable strength in at least managing the asset class that the portfolio is oriented towards, adds Karkera. The size of the pension assets is around R35 lakh crore, and of which 22%, close to R 7.72 lakh crore is with the NPS.
Be aggressive with retirement savings
However, Dev Ashish, founder, Stable Investor, says one should not look only at NPS to plan their retirement. It can be one part of the retirement planning bucket, which has components like EPF/PPF (Employees’ Provident Fund/ Public Provident Fund), Equity funds and NPS.
So how can one use NPS in their retirement portfolio? Different people will require different strategies. If you are young and have two to three decades left for retirement, then you can and should be aggressive with your retirement savings. This means your investments should have a large allocation towards equities via Scheme E, he adds.
Assuming EPF is being sufficiently contributed via EPF+VPF (Voluntary Provident Fund) +PPF, if you want to go via the NPS route, then it’s best to have a high component of equity in your NPS.
If your EPF corpus isn’t very large as your employer doesn’t have a generous PF policy and you have already utilised PPF R1.5 lakh annual limit, then you can use your NPS account as a debt product and have a high allocation to debt schemes G and C, says the investment advisor.
“For equity exposure, you can invest via pure equity funds. On the other hand, if your past employment(s) have led to a substantial accumulation of PF corpus and your equity exposure is low, then you can use NPS as a vehicle to increase equity exposure by making a maximum allocation to scheme E,” he explains.
Recently, Insurance Regulatory and Development Authority of India (IRDAI) has eased the requirement of submitting a separate proposal form for taking the Immediate Annuity products from proceeds of NPS. At present, NPS retirees submit an exit form to NPS and a proposal form to insurers at the time of superannuation. Now, the exit form of NPS will be treated as a proposal form for purchasing annuity, thereby reducing the time and efforts of senior citizens as well as insurers, IRDAI said.
Also, Tier I and II are two types of NPS accounts. While Tier I is a long-term one, and the amount invested in this cannot be withdrawn till retirement, Tier II is a voluntary savings account.
Though NPS is considered to be quite a restrictive product, it has many advantages too.
“Most people look away from NPS due to compulsory annuitisation where one is forced to put 40% corpus in low yield annuity plans. And no doubt this is a pain point. But remember that NPS is the only product that gives importance to putting in place a predictable income stream in retirement years. The rest of the products don’t focus on this aspect,” says investment advisor Ashish.
Also, from a retirement corpus diversification perspective, and the fact that annuity ensures a lifelong pension for the investor, NPS is said to be good for many who are not disciplined enough to generate regular income from a large corpus. Moreover, long lock-in means very low liquidity. Ashish says NPS is a pure retirement product. It’s not meant for anything else and hence, discourages premature withdrawal.
“NPS is the only retirement-focused product that tries to put in place a real source of reliable pension during retirement years. This is a good thing for those who would find it hard to generate regular income from their retirement kitty,” he adds.
Tax benefits
Those who are contributing to NPS are eligible for tax deduction up to 10% of the salary and the maximum limit is R1.50 lakh under Section 80 CCE. Apart from this, one can claim further tax benefits on contributions up to R50,000 under section 80 CCD (1B).
A low-down on NPS
National Pension System (NPS) helps in creating retirement corpus in the long term
NPS offers four kinds of asset classes – Asset class E (with up to 75% equity), Asset Class G (100% govt bonds), Asset Class C (100% corporate bonds) and Asset Class A (5% alternate assets)
It offers two kinds of accounts - Tier 1 and Tier II
Up to Rs 2 lakh contributed towards NPS is eligible for income tax deduction