Save now or repent later is the main premise of any retirement plan. If you want to continue living a comfortable life post retirement, without having to compromise on your standard of life, you need to start planning for your future right now.
What is the National Pension System (NPS) and How Does It Work?
Definition: In essence, the National Pension System (NPS) is a “defined contribution plan” in which employers contribute directly into a fund belonging to their employees. Launched in 2004 by the Government of India, the NPS is regulated by Pension Fund Regulatory and Development Authority. This plan was initially introduced for government recruits and in the year 2009, was opened up for the general public.
It is based on a unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon joining NPS.
The National Pension Scheme is India’s answer to the US’ retirement scheme-401(K).
Age eligibility: This government approved pension scheme is available to people in the age group of 18 years to 60 years. Though mandatory for government employees, it is optional for others.
Accounts: This scheme comes with two account options: a compulsory Tier I account and a voluntary Tier II account. Tier I is the primary account without which the subscriber cannot open a Tier II account. While Tier-I is a basic pension account with restrictions on withdrawal, Tier-II is a voluntary savings option from which a person can withdraw money freely.
Contributions: The minimum annual contribution for Tier I account is INR 6000 annually, that can either be paid as lump sum or in instalments of at least INR 500. For Tier II account it is INR 2000 in lump sum or instalments of at least INR 250.
Key Operational Aspects of NPS:
For Tier I Account,
For Tier II Account,
*IDFC Pension Fund has recently opted out of NPS; DSP BlackRock Investment Manager has received approval to manage the corpus.
Taxation Benefits under NPS:
The financial Year 2015-16 budget announced an additional INR 50,000 deduction from gross taxable income for those investing in NPS. In addition, the finance minister made withdrawals from NPS on maturity, tax free up to 40% of the total corpus. These benefits have generated a positive response among the public towards this retirement plan, resulting in an upswing in subscription rates.
Thus, NPS is an ideal retirement plan option that provides exposure to equity and instils investment discipline while allowing additional tax benefits for the investor.
Aegon conducted a series of surveys across 15 countries and discovered that Indians are most prepared and confident of living a comfortable lifestyle after retirement.
You may be a couple of years or decades away from your retirement, but it's imperative to plan and save for retirement, much in advance. Planning for retirement may seem an arduous task, but if done properly, will make your retirement stress-free and enjoyable!
Creating the right retirement plan is not just about being disciplined about money. How you finalize your asset allocation strategy will ultimately decide whether you will have a financially secured life after retirement. Combine prudence with flexibility to come up with the right asset allocation strategy for your future.