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HindustanTimes Sat,20 Sep 2014

Does the changed NPS work any better?

Deepti Bhaskaran , Hindustan Times   September 14, 2013
First Published: 01:48 IST(14/9/2013) | Last Updated: 01:59 IST(14/9/2013)

The Pension Fund Regulatory and Development Authority (PFRDA) received a big push towards becoming a statutory authority when Lok Sabha cleared and Rajya Sabha passed the PFRDA Bill, 2011 last week. The Bill now needs to be signed by the President to become law.

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What does it say?
The Bill gives regulatory powers to PFRDA, which started operations through an executive order in 2003. At first, the National Pension System (NPS), PFRDA's pension scheme, was extended to central government employees who joined services from 2004.

Although it was designed to bring the unorganised workforce into a formal pension system, the government moved its employees to NPS to lower the burden on its coffers from the earlier defined benefit pension programme. It was only from May 1, 2009 that NPS was made available to the entire workforce.

In the absence of statutory authority, PFRDA does not have the power to penalise the entities it regulates. Once it gains statutory powers and the authority, it can pull up errant pension sector participants.

The Bill also stipulates the formation of a pension advisory committee with representation from all big stakeholders to advise PFRDA on important matters of framing regulations under the proposed PFRDA Act.

The Bill also states that the membership of PFRDA will be confined only to professionals having expertise in economics, finance or law.

Changes in NPS structure
Withdrawal from tier I account: The Bill seeks to initiate some structural changes to NPS. The tier I account of NPS locks in subscribers' money till they turn 60. So if you wish to withdraw before 60 you will need to annuitise at least 80% of the corpus.

At 60, a subscriber can withdraw about 60% of the retirement corpus and "annuitise" the remaining 40% - buy a pension product that gives periodic income. The proposed law allows for withdrawals from the tier I account with limits on the amount and the number of withdrawals.

The amendment states: "Withdrawals not exceeding 25% of the contribution made by subscriber will be permitted from the individual pension account subject to the conditions, such as purpose, frequency and limits, as may be specified by regulations."

Some experts see this is a regressive step since NPS has a tier II account, too, that allows for liquidity, and therefore, they see no sense in changing the spirit of the tier I account.

Tier II account works more like a savings account from which you can withdraw whenever you wish. There aren't any tax benefits on the tier II account though.

Introduction of guaranteed return option: According to the amendments to the Bill, a subscriber can opt for investing in schemes providing minimum assured returns.

Further clarity is awaited on exactly how these products will look like: whether a guaranteed rate of return will be announced every year as is the case with EPF and the Public Provident Fund (PPF), or the product will carry a minimum rate of return as is the case with pension products offered by life insurance companies.

Analyse before investing
NPS will now become a well-regulated product with tweaks to provide assured returns and a withdrawal facility. The only missing aspect in its architecture is tax benefit.

Although contributions to NPS are tax deductible under the overall section 80C, the 60% corpus that can be withdrawn on maturity is taxable. With the implementation of the proposed Direct Taxes Code, it may come in line with other long-term products such as EPF and PPF which give tax-free maturity proceeds.

However, look deeper before you invest. The current rules allow only 50% exposure to equities and, unlike the original design that mandated investments in index funds only, the equity fund now will be actively managed.

For an aggressive investor, who wants to target retirement savings largely through equity, NPS may not be the choicest product. Even conservative investors should have a combination of products for their retirement corpus.

"NPS is a great pension product but currently it's not tax-efficient. On maturity, the annuitisation of at least 40% of the corpus is a deterrent because it's difficult to predict future needs. I would recommend an exposure up to 25% in NPS," said Suresh Sadagopan, a Mumbai-based financial planner.

Remember that withdrawals are necessitated by short-term needs and for such needs, you shouldn't look at a long-term product like NPS.


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