Wealthy Wednesdays: Why you should invest in a pension fund

Background 
The National Pension System (NPS) scheme was introduced in 2009 for all citizens including those in the unorganized sector. The scheme encourages voluntary savings so as to provide for income security after retirement. The Pension Fund Regulatory and Development Authority (PFRDA, www.pfrda.org.in) sets transparent investment norms while the NPS Trust reviews and monitors the pension schemes.

Advantages 
All the advantages of long-term savings are incorporated into this scheme; the contribution can be nominal, periodicity and frequency of contribution are flexible and wealth creation is possible because of the long tenure and the nature of these investment plans. Besides, there is the ease of continuity as transactions can be carried out from anywhere in the country. Tax benefits and low-cost features only add to the list of attractions.

Eligibility
Any individual aged between 18 and 55 can open an account. Know Your Client (KYC) compliance is mandatory. The account can also be opened by a corporate. The NPS savings and benefits thereof are exclusive of other Providend Fund (PF) contributions, which one may have invested in already.  For an NPS tier 1 account, the minimum amount you can contribute is ₹500 per month or ₹6,000 per year—subject to a minimum of four contributions per year. The frequency of investment is entirely up to you. But it is preferable to contribute each month out of your salary, as you would in the case of PF (even though, at present, there is a fee of ₹10 per transaction).

Number for Life
The account number allotted is called a Permanent Retirement Account Number (PRAN). This number is unique to every individual across the country; even if a person changes his job or address, the number remains unchanged. A number of banks/finance companies are designated to open the account. The Point of Presence-Service Provider (POP-SP) list can be viewed on the PFRDA website or at www.npscra.nsdl.co.in. 

Fund Management
The amount received into the fund is invested in one of two funds—an active-choice fund or an auto-choice fund —according to your risk appetite. In an active-choice fund, the subscriber has to convey how he wants his money invested from a set of options provided. In the auto-choice fund, the investment decision is taken by the fund managers, based on their perception of the best options depending on the lifestage of the subscriber. A Central Record Keeping Agency keeps all the records pertaining to your account and provides you with an annual statement. Apart from the POP-SP, one has also to choose a Pension Fund Manager from out of six listed entities that manage and authorise the release of the annuities when due.

Tax Benefits
There are tax concessions available for these investments. The fees of about 0.0009%—amongst the lowest for money-managers—are deducted from the Net Asset Value (NAV) of the fund. At present, for an individual, there is an upfront account opening charge of ₹50 and an annual maintenance fee of ₹350.

Withdrawal Options
Since the idea is to ensure monthly income post retirement, at age 60, at least 40% of the corpus must be invested in annuities. The balance can be withdrawn at one go or in a phased manner up to age 70. For withdrawals prior to age 60, a minimum of 80% of the pension wealth would be allocated for purchase of annuities. In the unfortunate event of a subscriber's death, the nominee will receive the pension wealth.
Other Options: You can, in addition, opt for a tier 2 savings option where you can voluntarily invest, according to your resources. In emergencies, the savings in a tier 2 account can be withdrawn. Operational instructions for the tier 2 account are awaited from PFRDA.

In Conclusion
We've offered a birds-eye view of the pension scheme which is about 5 years old. Obviously, there aren't any inputs from retirees on the positive impact of this scheme yet. But, if one considers how retired government servants wax eloquent about their pension income, and financial consultants are forever steering us towards starting early for a chinta-free retirement, the NPS route for wealth creation should be on top of our to-do list.