Initially the New Pension Scheme received a very lukewarm response from the investors with not many subscribing to it. There were many considerations which had more drawbacks then its benefits. EPF or Employee provident fund was still a more lucrative retirement product than this scheme. To make it more appealing the scheme has gone through lot of changes related to fund management, distribution and tax advantage.
In EPF along with EEE status the most lucrative benefit is flexibility of partial withdrawal for some important needs which may arises in one’s life. This was missing in NPS and there was huge demand for it from the investors. Keeping this in consideration now PFRDA too has brought new rules for allowing partial withdrawals well before the retirement age . There are some more changes which this scheme has undergone which now make it now a more viable retirement product.
Let see what are these changes and how they benefit to its subscribers:
The Old Rule
NPS is aimed at accumulating corpus for your retirement. To achieve this previously there was no withdrawal allowed from this scheme till the age of 60 years. Even prematurely exiting was allowed with condition that 80% of the accumulated corpus is converted in annuity. So a subscriber has to mandatorily contribute till the age of 60 years with minimum contribution pegged at R 6000 p.a. This contribution is invested in the equity market, government securities or other fixed income investments options as chosen by the the subscriber. One can either opt for auto allocation feature or manage allocation himself. The investment in equity market is restricted to 50% and is primarily a passive investing through index funds. At age 60 one have to compulsory take 40% of the corpus in annuity form and rest can be withdrawn by the subscriber. So effectively it was completely aimed at retirement with no premature withdrawal allowed from it.
The New Partial Withdrawal Rule
The withdrawal rules have been changed by PFRDA. A window has been opened after 10 years of continuation wherein a subscriber can withdraw 25% of the contributions made in these years to meet some of the life goals. These can be related to children education, marriage, house purchase or construction or medical treatment on some specified diseases, which is much like in EPF. To derive eligibility for corporate employees the contribution will include of their own and not the employer. NPS will cover in total 13 critical illnesses which have been listed in the rule. This flexibility of this partial withdrawal can be utilized 3 times in the whole tenure of NPS. But after making one partial withdrawal there has to be a gap of five years for making second and third withdrawal respectively. Kidneys are one of the most commonly donated organs from living donor. Relief has been given on medical treatment wherein this time gap will not apply. So even after making a withdrawal if situation arises for medical treatment subsequent withdrawal can be made without waiting.
The Exit Rule
The other change has happened for exiting from the scheme. Till now 60 was the default retirement age for NPS and one can exit only at this age. The rule was applicable to both corporate employees and self-employed professionals. But since the default retirement age in many corporate is 58 the flexibility has been introduced wherein a subscriber of a corporate NPS scheme can exit from it at the age of retirement set by the company. Here NPS subscriber will have to mandatorily take 40% of the corpus in annuity form and rest can be withdrawn as lumpsum. The other challenged faced on the verge of retirement is the need of more pension. Many a times even at age 60 the accumulation for the right amount of pension is not good enough. To address this issue flexibility has been introduced for non-government employees. Now if one wishes to contribute longer one can do so by extending NPS contributions till the age of 70. Once this age is reached there are no further contributions allowed and a subscriber has to exit from the scheme. Apart for this one can also defer the receivable of pension for three years which will benefit subscribers who have opted for some portion in equity and they find markets not in favor when reaching the vesting age. Additionally if the amount of corpus is Rs 2 lakh and below at retirement age or Rs 1 lakh and below before it then the entire corpus needs to be withdrawn and there is no conversion to annuity.
The new withdrawal rules and exit rules are in favor of investors and bring NPS at par with the biggest retirement product EPF. The changes throw an opportunity for its subscribers to utilize the funds partially for some basic needs or emergencies and give time to investments when markets are not in favor. There are benefits for both self-employed and corporate employees. But do remember that this is a retirement product and should be aimed at accumulation for the same. Make use of withdrawals only if there is no option left. But most importantly if NPS has been given a miss until now it’s time to include it in your retirement planning.
How you have planned your investments for retirement? Will you consider NPS now?
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The article first appeared on first post. Read the original here NPS Changes