National Pension Scheme, The Integrated Part of Retirement Planning
National Pension Scheme is a retirement solution scheme that the Government of India first introduced on 1st Jan 2004 for central, and state government employees, and employees of autonomous bodies except for armed forces.
It rolled out for every citizen of India on 1st May 2009 on a voluntary basis including for unorganized sector workers to inculcate the habit of saving for retirement.
What are the types of retirement schemes?
Basically, retirement schemes are two types.
The first one is called the defined benefit pension scheme and the second one is called the defined contribution pension scheme.
The central/state/autonomous employees before 1st Jan 2004 were covered under the defined benefit pension scheme.
The central/state/autonomous employees after 1st Jan 2004 are now covered under the defined contribution pension scheme which is called National Pension Scheme also known as the defined contribution pension scheme (DCPS).
Why it’s Important to take NPS?
We have seen our parents who worked either in the central or state government body, were entitled to a defined benefit scheme.
We have seen, how they are enjoying their life after retirement.
We have seen, how they are supporting the family of an unemployed son.
They are not a burden on us rather they are assets even after working age.
Now the next question to ourselves.
What about ourselves after retirement?
Would we be able to support old-age health issues?
Would we be able to enjoy our life without any retirement corpus?
Would we be able to go on a travel spot after retirement?
Would we be assets or liabilities for our children?
There are many more such questions that will shake us from the inside. What is your plan for your retirement planning which is the most ignored area of personal finance?
If your answer is a big NO, then the NPS is the best solution for your retirement.
The government is making it more attractive continuously as the people become more aware of his/her retirement.
I hope now we got the clarity on how it important is to take a national pension scheme.
Which feature, makes it most attractive?
Although NPS has many features which make it more attractive but still there is a feature that makes it most attractive and that most attractive feature is the Safety of the Investment Amount.
As there is question comes to our minds is the safety of invested amount during the working & non-working age.
As the national pension scheme is a Government of India-sponsored scheme, so it has a top-notch safety level of the invested amount.
You do not need to worry about your investment but just keep doing investments.
The other thing that makes it the ideal solution for retirement is, that it has a decent return on investment over the period along with withdrawal interlocks to the investment amount.
As human behavior always tends to follow the easy path if there is a need for money in urgency.
But NPS has no such easy way of withdrawing, so a person generally tends to avoid withdrawing money from it.
Hence it results in a good corpus amount at the start of retirement age.
The other special features of this scheme are
It is simple
It is very simple to open an account with the nodal office of a person and get a Permanent Retirement Account Number (PRAN).
It is portable
Each subscriber is identified by a unique number (PRAN) which is portable i.e., will remain the same even if he/she gets transferred to any other office.
It is transparent
NPS is a transparent system wherein the pension contributions are invested in the pension fund schemes and the subscriber is able to know the value of the investment on the daily basis.
It is regulated
NPS is regulated by PFRDA. It has transparent norms & regular monitoring and performance review.
It is cost effective
The costs involved are very low and transparent.
Tax benefits
As per the recent provisions in the union budget, withdrawal of 40% of the NPS corpus on maturity, will not attract any tax.
Also, the service tax payable when buying annuities has been waived off for those buying it through the NPS corpus.
It also has tax benefits under the section of 80CCD (1) & 80CCD (1B)
Freedom to choose annuity service providers
National Pension Scheme investors have the option of going with the best annuity provided, of their choice, to use 40% of their accumulated corpus to buy annuities.
Annuity service providers are responsible for delivering a regular monthly pension to the subscriber after exiting the NPS.
Conclusion
So, National Pension Scheme is a defined contribution scheme with a lot of features and has a unique importance in this high-inflation world.
If we start as early as possible then will get the benefit of the power of compounding which is the eighth wonder of the world.
In the next article, we will discuss the investment strategy followed by National pension scheme fund managers and will identify who is the best fund manager for national pension scheme.
What is your opinion about NPS? please share your views.