New Pension Scheme: Key Features

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Soon we will have a new option to park our fund for the retirement planning.

From May 1st 2009 government is introducing “new pension scheme (NPS)”.

The pension scheme is similar to what ULIP pension plan offers you the variety of funds, option to choose fund.

Like IRDA which regulates insurance, The “Pension Fund Regulatory Development Authority of India” (PFRDA) is the regulator for the Pension Fund, through the New Pension Scheme (NPS).

  • Total 6 pension fund managers appointed by government to manage the fund.

UTI Retirement Solutions, SBI, ICICI Prudential Life Insurance, Reliance Capital, IDFC AMC and Kotak Mahindra AMC

Main highlights:

  • For long term, that is you can even invest for 35 to 40 years.
  • Very low charges:

Unlike in in ULIP where charges are as high as 20% of premium amount here charges are as low as 15 to 20 paisa per Rs. 100.

  • Option to choose investment strategy based on asset classes

1) Equity (E Category)(High risk, high return) restricted to NIFTY 50 index.

2) Corporate bonds(C Category)(Medium risk)

3) Low risk (G Category).

Investors can also indicate a mix amongst all three.

  • Points of Presence (PoP - basically distributors)

It can be purchased from variety of sales channels like Bank branches and post offices.

  • Investor can change fund manager at no cost.
  • Central Recordkeeping Agency (CRA) to works as intermediately between PoP and fund managers.
  • A PRAN (Permanent Retirement Account Number) is issued to each investor, which will remain unique and even if one changes job or Fund manager it will remain the same, so unlike EPF this is much convenient.

The Disadvantage:

  • It falls under EEE (exempt-exempt-taxed) which means it is taxable on withdrawals, so if one compare it with existing PPF or EPF, which are totally tax free, NPS looks less attractive, however as one can choose equity fund to invest money here, one may get high return.
  • Returns are not guaranteed.

Investment rules are yet to be finalized for this product, so in coming days we are going to hear lots about this product.

Pension sector which is ruled till now by only insurance companies, With the NPS, which offers great benefits at very low cost and with great flexibility I believe that we will soon see a major change in the pension sector with very innovative low cost products.

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