TomorrowMakers

If you are a National Pension Scheme subscriber, the increased limit on equity investments could mean a stronger financial future.

NPS Subscribers

In its attempt to appeal to private sector subscribers, PFRDA (Pension Fund Regulatory and Development Authority), is aiming to raise the limit on active choice equity investments from the present 50% to 75%. A concept paper containing the proposal has been released by PFRDA, they will make a verdict after receiving feedback and comments from stakeholders and the public. Both new and existing subscribers, who stand to benefit in the long run, will be targeted with this move.

Those subscribed to NPS (National Pension System) can buy into NPS by the following two routes: Auto Choice and Active Choice. This cap is only projected for the second choice. For the former option, the allocation of equity is presently limited at 75%.

Related: What is National Pension System and how it works

 

A matter of choice

As far as Active Choice goes, the allocation of equity presently has a cap of 50% of a person’s investment. The new 75% limit will remain until the subscriber reaches the age of 50 years, after which the apportionment will consequently abate to 50% till 60 years. The subscriber then has to reinvest the tapered portion in further fund options like alternate assets, corporate debt and government debt, along with equity funds. Of these options, an individual can reinvest 100% in corporate and government debt, 50% in equity funds, and only 5% in alternate assets.

In Auto Choice, subscribers have three life cycle fund options (LC 25, LC 50, LC 75) from which they can choose. If coming to a decision is difficult, there is an auto choice alternative which allows invested funds to automatically commence with the greatest amount of equity exposure of 75, 50, or 25% up to a specific age. Then, as a person ages, it tapers off. Incidentally, LC 25 and LC 50 are fund options that were brought in November 2016. The already existing fund option LC 75 is what subscribers prefer over LC 25.

Related: Retirement planning for pros: National Pension Scheme

While the Bajpai committee report had, in inclusion to other suggestions, recommended a more active fund management approach, the NPS takes a passive approach, presently. Since this is a scheme which focuses on retirement in the long-term, choosing the right asset class will be beneficial in shaping your final amount.

Impact on the layman

NPS is a scheme that employees and those who are self-employed can invest in, claim a tax deduction for, and qualify for additional tax benefits. However, those who invest in NPS can only withdraw from it at the age of 60. Withdrawing before that is discouraged because only 20% of the entire amount can be withdrawn and the remaining amount needs to be compulsorily used to purchase an annuity.

Although it comes with the advantage of tax savings, NPS can be a problem to several investors on many levels. Some include taxable returns and absence of liquidity.

Related: Don't let your spouse or kids be your retirement plan. Here's how to build your own

Overall, you do get tax benefits from NPS, but the stakes are high. Further, until the age of 60, you cannot draw from your investment. You also have a compulsory annuity. Your returns are moderate, and they will be taxed. All these make it a less profitable investment for most people.

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