We discuss modifications that can make the National Pension Scheme (NPS an attractive retirement solution accommodating changing needs. The New Tax Regime has made redundant the “extra Rs. 50,000 tax saving” (or reduction in taxable income). So, finally, NPS can attract the right kind of investor.
The new-generation retiree wants the flexibility to retire early without restrictions and manage the nest egg using a bucket-like strategy. The mandatory annuity requirement is not that big a deal breaker.
The biggest drawback of the NPS is its rigid exit rule. Anyone exiting the scheme before attaining the age of 60 (or before the stipulated age of superannuation) will have to buy a pension plan for 80% of the corpus.
This is not practical. Very few corporate employees would continue working until they turn 60. Once they turn 50, many would look for short-term projects or consultancies. Also, see: How to prepare for the “new normal” in retirement planning
1: The NPS exit clause should be modified to remove the 60-year limit. Exit at least after age 50 should be allowed with the same 40% annuity clause (ideally, the annuity clause should also be removed, but that is unlikely to happen).
Many corporate employers offer NPS as a choice; some even allow employees to split their contributions between EPF and NPS. However, an option to change the employer contribution from EPF to NPS is rarely offered. Also, when an employee shifts from an NPS-friendly employer to an EPF-centric employer, it clutters the portfolio.
2: NPS should be offered as a choice by all employers. This way, existing NPS accounts can be used for retirement contributions. The NPS employer contribution is tax-free (to both parties) and has a much higher deductible limit than the employee contribution. To understand the limit rule, see Do Not Invest Rs. 50,000 in NPS for additional tax-saving benefits! The tax-free status is also applicable in the New Tax Regime.
The NPS has evolved multiple exit options where one can defer the annuity or lump sum payout and systematically withdraw the lump sum. Details are explained here: NPS Systematic Lump Sum Withdrawal (SLW) Facility Explained.
Although the scheme has come a long way regarding post-retirement flexibility, withdrawals or deferrals must be done from the same pre-retirement corpus and asset allocation options.
Even if the equity is reduced to zero after retirement, the bond portfolio can still be volatile and dangerous to withdraw from systematically.
3: NPS should allow subscribers to continue investing the remaining corpus for life. A new money market asset allocation option should be introduced for systematic withdrawals with minimal interest rates and credit risks. A small equity exposure can also be allowed. Then, the NPS can effectively be used as a part of a retirement bucket strategy to generate inflation-protected income after retirement. Here is an example: Retirement plan review: Am I on track to retire by 50? This flexibility is more valuable than a “special annuity rate” for the NPS that the regulator seems to be working on.
The pension fund regulatory authority has modified the original form of the NPS several times, learning from experience. Let us hope they look beyond a “pension-oriented” mindset and make the NPS a flexible retirement solution for the new-gen retiree.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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