Thursday, May 7, 2009

New Pension System; Details about NPS

New Pension System (NPS) - Many people even call it New Pension Scheme.

OBJECTIVE
NPS is regulated by the governing body PFRDA and is voluntary defined contribution pension system in India. The aim of this scheme is
1) Provide Old age income
2) Provide market based income over long term with minimal risk.
(The scheme will have around more equity exposure if you are young and it will keep on reducing to less then 10% when you reach retirement)

HOW Does it work ?
you will have to get a PRAN (Permanent Retirement Account Number) from point of presence. (list of point of transaction is available at http://pfrda.org.in/writereaddata/linkimages/POP-SP%20LOCATION%206-may9759639400.pdf)

The forms are available at http://pfrda.org.in/indexmain.asp?linkid=180

There are two types of accounts
1) Tier-I pension account : This is a non-withdrawal account till retirement
2) Tier-II savings account: This is simple voluntary savings facility. you will be free to remove your money from this account whenever you wish.

The customer need to make two choices
A) The customer has to select one fund manager out of 6 so far
1) ICICI Prudential Pension Funds Management Company Limited
2) IDFC Pension Fund Management Company Limited
3) Reliance Capital Pension Fund Limited
4) SBI Pension Funds Private Limited
5) Kotak Mahindra Pension Fund Limited
6) UTI Retirement Solutions Limited

B) customer has to select Investment option out of 3 choices. (By - default 'Auto choice' will be selected)
There are 3 classes defined as below in which your fund will be invested.
Asset class E - 'High return, High Risk' - Investment is mostly in Equity(That also only Nifty stock)
Asset Class C - 'Medium return, Medium Risk' - Investment is mostly in fixed income by corporates
Asset Class G - 'Low return, Low risk' - Investment is mostly in purely fixed income by government
you can select the ratio in which you want to invest your wealth in, E class can have at the most 50% of your investment. G and C class can have maximum of 100%.

DEFAULT option is Auto choice a Life cycle fund
If you do not select the investment choice, then the default investment will be in Auto choice called Life cyle fund

The way it works is as follows depending on your age throughout your life the asset allocation will keep on changing every year. The following table gives you an idea about your asset allocation
Age Asset E Asset C Asset G
35 50% 30% 20%
40 40% 25% 35%
45 30% 20% 50%
50 20% 15% 65%
55 10% 10% 80%

This is a very good choice so for most of the people who do not understand financial planning this is by default very good recommended thing government has done.

How Much minimum do I need to invest in NPS every year ?
1) You need to make minimum of 4 contribution in year with a minimum of Rs 500 in each transaction and overall minimum Rs 6000 in a year. There is however no upper limit as of now.

What are penalty charges if I am unable to contribute in a particular year ?
For every year default you will have to pay Rs 100 as penalty. Also during the period you do not pay, NPS keeps charging this penalty every year from your corpus, till it goes zero and then the account will be closed.

Can I withdraw money from the NPS in emergency ?
In Tier I scheme is a non - withdrawal scheme till you turn 60 or in case of death
In Tier-II scheme however is a voluntary savings scheme, which will allow you to withdraw money. The starting date of this scheme will be announced later.

What are the charges.
The best part of this scheme is the charges are very low.
Fund Management charges - 0.0009% on value of investment every year, (Note: this in comparison to other insurance companies which charges 0.75% to 2% is very very low)
Transaction charges are also very low.

I am 30 years now and need a pension income of Rs 10,000 per month when I retire at 60 years how much should I contribute in the scheme ?
This will depend on the asset allocation you select and the performance of the fund which again depends on market conditions. however for reference the returns from the past similar scheme run by PFRDA for government employee was around 14%.

To be on the safer side Assuming you will need a corpus of around Rs 16 lakh for monthly returns of Rs 10,000 so you will have to invest annually Rs 84,000 or Rs 7000 per month. To achieve your goals.


How to contact in case of queries for NPS ?
Toll free number - 1 800 222 080
Website for PFRDA - www.PFRDA.org.in
Website for accessing your NPS account online - www.npscra.nsdl.co.in

For Once This is an excellent pension scheme for the people in the unorganized sectors. If implemented properly this will be a great boon to the people of India and they thank Government during there old age. This scheme is really good for people from blue collar to businessmen to even your sandwichwalla and milkmans.

My only concern is who will market this scheme to the common man. I hope government does lot of marketing for this scheme.

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