NPS: At a Glance

SBI National Pension System is the most economical and least known Government
approved pension scheme for Indian citizens in the 18-60 age group. It was launched by Pension
Fund Regulatory and Development Authority (PFRDA) in 2004. The minimum yearly
contribution is Rs 6,000, which either can be paid in one go or in
installments of at least Rs 500.
What is National Pension Scheme?
National Pension Scheme being the cheapest market linked retirement plan among all other
Retirement plans (EPF, PPF and Mutual Funds) suggests that it would have recorded maximum
number of sales. But due to excessively less payment of incentive/commission to the
intermediaries, it is not getting promoted by them.

The Scenario when the scheme was launched was worse, the fund management cost was limited
at 0.0009 per cent and points of presence, or PoPs, where investors open the account, were not
permitted to charge more than Rs 20 per account, regardless of how big the investment was.
Then there was an account opening charge of Rs 50 for the central record-keeping agency, or
CRA, in addition to an annual CRA fee of Rs 225.

The fund management fee for non-government funds has now increased to 0.25 per cent and for
government funds it has increased 0.0102 per cent. Also, POPs are permitted to charge Rs.100
plus 0.25 percent of the investment. This change will surely act as an encouragement for the
agents who will now actively market the product.

Types of National Pension Schemes (NPS):

There are two types of accounts that NPS offers:

Tier-I Account
It is a basic pension account with limitations on withdrawal
*Before attaining 60 years of age, only 20% of the contribution can be
withdrawn while the rest 80% has to be necessarily used for buying annuity
from a life insurer. Annuity is a series of payments made at fixed intervals of time . Annuity
plans necessitate the insurer to pay the insured income at regular intervals until his death or till
maturity of the plan.
*After attaining the age of retirement also (60 years), close to 60%
contribution can be withdrawn and the rest 40% again has to be used to
purchase annuity from approved life insurers.
Tier-II Account
It is a voluntary savings option from which a person can withdraw money limitless.
Fund Managers
The individual/organization that takes decisions regarding any portfolio of investment (mostly a
mutual fund, pension fund, or insurance fund), as per the stated goals of the fund. It is necessary
to opt for a fund manager while opening the account.

The money is managed by seven fund managers appointed by the PFRDA. The government
employees accounts are taken care of by one of the best three government fund managers, LIC
Pension Plan, SBI Pension Plan and UTI Retirement Solutions, the money invested
by others is managed by one of the six fund managers, ICICI Prudential Pension, IDFC
Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension
Funds and UTI Retirement Solutions.
Mentioned below are the salient features of both Tier-I and Tier-II account
Tier-I Tier-II
In case of Government fund, the The contribution is Rs.1000 at the time
contribution from the of account opening or a minimum
employee's side is 10% basic contribution of Rs.250 per month can
salary + dearness allowance also be chosen. Also, it is necessary to
with exactly same contribution maintain a minimum balance of Rs. 2000
from the employer. at the end of financial year.

But in non-government fund, the -

investor pays Rs.6000; with a choice of
paying at least Rs. 500 per installment

In a Government fund, the default The investment is a mix of equity, corporate

investment is made mostly in Corporate bonds, government funds, FDs, liquid funds etc.
and Government bonds

In a non-Government fund, the default -

investment is in stocks, corporate
bonds, government funds, FDs, liquid
funds etc.

Costs Involved in National Pension Scheme

As discussed before the costs involved are minimal, only 0.25% of the investment is paid to the
intermediary as fund management fee. Let us see how this cost is different from the costs of the
other leading pension plans .

Types of Funds in National Pension Scheme

 Average
Class Of Return Since
Fund Invested In Risk Launch (%)
E Index based Stocks Carry market risk like any 3.79%
large cap equity fund

C Bonds issued by State Going by the quality of 8.66%

Govt, PSUs and Private companies, risk would be
Firms low.

G Bonds issued by Central Lacks default risk but 5.92%

Govt. volatility can't be avoided in
long term bonds.

Depending on how open the investor is to risk, the corpus can be divided
among these three fund classes. Exposure to equity cannot be more than
50%. However if the allocation is not specified, the exposure to various
classes, especially equity is decided on the basis of age.
The above figure also tells us about the average performance of National
Pension Scheme funds in different classes.
The investment mix according to the age of the investor:
Age of the Percentage of Investment in
Investor Various Classes
Up to 35 Years 50% Equity and 50% Debt

40 Years 40% Equity and 60% Debt

45 Years 30% Equity and 70% Debt

50 Years 20% Equity and 80% Debt

55 Years 10% Equity and 90% Debt

So with increasing age the investment corpus gets more inclined towards Debt
Pros and Cons of NPS
Pros:
Additional Tax Benefit:
The Finance Bill 2011-12 permits tax deduction on contribution up to 10 per cent of basic salary
and dearness allowance (DA) made by an employer towards the national pension scheme
(NPS) account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit
and is applicable if the contribution is done by the employer. This is the reason why corporate
houses are accepting NPS happily.

There has been a hike in inquiries about NPS mainly because of the tax benefit under Section
80CCE.
Higher Fee to Intermediaries:
The fund management fee for non-government funds has been raised from 0.0009 per cent of
assets under management to 0.25 per cent. The fee for government funds has been changed to
0.0102 per cent from April this year

PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible
fee of Rs 20 previously.

The change is promoting New Pension Scheme by offering incentives to distributors and
fund managers. The fund management fee of 0.25 per cent is nothing when compared to other
products.
Cons:
Tax on Maturity Proceeds:
There is confusion about taxation at withdrawal. According to the present laws the funds would
be taxed at withdrawal.

Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least
40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are
not tax-free.

The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal.
However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as
well.

The tax at withdrawal stands in the way of making NPS the best pension scheme.

Mandatory Annuity:
Another lag is limitation on withdrawal from Tier-I account, the primary account for pension
savings. On maturity also, one can withdraw only around 60 per cent funds; the rest has to be
used to buy annuity, the returns from which are not tax exempted.

Even the annuity also has to be bought from one of the six PFRDA-approved insurers. Options to
choose from in case of the number of annuity providers are anyway less with LIC commanding a
70 per cent market share.

Low on Equity:
NPS portfolios are restricted to have more than 50 per cent exposure to equity. It spells loss for
people in their 20s or early 30s, as equity has shown to offer 12-15 per cent returns per year
over long periods.

In comparison to traditional retirement schemes such as EPF and Public Provident Fund,
which refrain from investing in stocks at all, NPS is the best as it is a lot more flexible in terms of
equity exposure.
So, investors wanting higher equity exposure can go for equity mutual fund schemes such as
large-cap funds and equity exchange-traded funds.
In Comparison to its competitors; EPS and Mutual Funds, NPS leads by
*Scoring better in performance (refer to the investment mix table) and costs
*But the 40% necessary investment in annuity after attaining the retirement
age, 50% cap on equity exposure and taxation on annuity returns does make
NPS a not so favorable option.
It is for the investor to decide as performance and costs are good characteristics of
NPS that make the latter shine brighter than its expensive counterparts Such as
Mutual Funds.