The benefits of the National Pension Scheme (NPS) significantly far outweigh the effort needed to learn and understand about investing. For years, you have put aside money for your retirement through employee provident funds, public provident funds, other government guarantee schemes or fixed deposits.
These days, many of you now do it through systematic investment plans of mutual funds or unit-linked insurance plans offered by insurers. The increased use of these products has a lot to do with understanding what you get at the end of the term of your investment.
Pension schemes across many countries in Europe are based on government guarantees. They are said to be ticking time bombs as those economies age rapidly. In India, 32.7 crore people are enrolled in employee provident fund (EPF) accounts. That is about 25% of the population. However, a provident fund is a defined benefit scheme.
It burdens the government as the return is guaranteed based on the 10-year Indian government bond yield. The government always gives a return higher than that benchmark. Overall, the government contribution to pensions is around Rs 2,76,000 crore. The overall interest the government pays on borrowing is Rs 12,76,000 crore. Ideally, the government would want to cut such a high bill.
Since its inception in 2008, the government has quietly started a revolution. It is encouraging employees to sign up for the National Pension Scheme. It is a defined contribution scheme where you allocate the money you put in, and your employer puts it according to your risk profile. The maximum amount that you can allocate to equity assets is 75%.
You can choose a smaller percentage of equity allocation if you are risk-averse. The average annual return on NPS with maximum equity allocation was 11%-12%. That is good enough to cover inflation and create retirement wealth. If you invested Rs 25,000 at age 25 at an 11% average return up to 50, your retirement corpus would be just under Rs 4 crore.
As your income rises, you can allocate more money to NPS to ensure you do not compromise your lifestyle. If you think equity allocation is too risky, you can choose fixed income allocation to generate a steady return of just under 10%. That is relatively less risky.
The more you contribute to NPS, the more you help the government reduce the interest burden. That frees up money for capital expenditure. The recent budget also encourages you to kickstart a pension plan for your child through NPS Vatsalya. The tax deductions are available under the new tax regime, too.
If you have a friend in the United States, you may have often heard about 401 (k) plans contributing to retirement. The NPA plan is essentially structured on those lines. In America, households have benefitted immensely. Since 1978, around 7.8 crore or a fourth of Americans hold such an account. The value of assets in these accounts is estimated to be close to $9 trillion. It is more than twice the size of India’s GDP. The astounding household wealth in America allows people to be the world’s consumers.
The current value of provident funds is Rs 24 lakh crore as of March 2024. The value of the NPS corpus is around Rs 13 lakh crore. It is way below the potential. As more people get into formal employment, the value of the corpus will only rise.
If you are not keen to dive deeper into financial learning, NPS is your retirement solution. You must not bother about anything else. We are perhaps two decades behind the United States in terms of growth in pension assets. Invest as much as possible based on your risk profile and professional advice.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)