At long last the Government of India has announced the new pension
Scheme for the general Public on May Day. The new pension was earlier
announced for the employees of Government of India only. Now any
citizen of India would be able join the scheme and plan their
livelihood in old age. This, however, is not the only pension scheme in
the country. In fact before this scheme was introduced there were two
distinct pension schemes in existence. The first one was from insurance
companies and the second one was from Mutual fund Houses. Then why
everyone was waiting relentlessly for this plan to be introduced ?
There
are few reasons. In India people generally tend to believe the
Government more than private sector. Secondly, the new pension scheme
is simple and Thirdly it is cost effective and fourthly it would be
managed by experts and has incorporated checks and balances so that
citizens do not loose heavily when money is required most.
The
scheme envisages that in younger age more investment would be made in
equity and slowly as the citizens grow older more investment would be
diverted to government bonds and fixed deposit of banks etc. This would
ensure low volatility. Even with such checks and balances it would not
be possible to predict the exact return, as investment would be market-
linked. In this connection it would be worth mentioning that employees
in the organized sector already have ‘ employees pension scheme’ where
employers and employees contribute 8.33% and 3.67% respectively of
salary. The return from the scheme is pretty low. The new scheme
provides for better return as part of the money would be invested in
equity market. However the invested money would be possible to be taken
out of the scheme only when citizen reaches the retirement age of Sixty
years. Upon retirement 40% contributions of subscribers will be put
under annuity scheme to enable them to get monthly pension.Balance can
be taken out within 70 years at any time in one or more installments.
In exceptional circumstances contributions can be taken out before
retirement but 80% money shall have to be put in annuity scheme.
The
regulators have classified investment under three categories-E, G, and
C from which citizens would be able to choose their portfolio. E class
assets means high return and high risk meaning equity participation
through index fund. Under the G asset class the investment is
restricted to Government bonds etc. Under class C asset investment
would be made liquid fund of MF, fixed deposit of banks etc. In case
Government employees mere 5% fund could be invested in equity where as
in general citizens category at least 50% investment could be made, in
stock market. In case citizens want they can leave the investment
choice to fund managers. This system would be known as “auto choice”.
Who can join the scheme?
Any Indian citizen between 18 and
55 years would be able to subscribe to the schme. At present, only
tier-I of the scheme, involving a contribution to a non-withdraw able
account, is open. Subsequently tier-II accounts, which permit voluntary
savings that can be withdrawn at any point of time, can be opened. But
to be eligible to open a tier-II account, you need a tier-I account. To
enroll subscribers will need to visit a point of presence (PoP), fill
up the prescribed form with the required documents. Once you are
registered, the Central Recordkeeping Agency (CRA) will send you a
Permanent Retirement Account Number (PRAN), along with telephone and
internet passwords. There is no investment ceiling. But the minimum
investment limit has been fixed at Rs 500 a month or Rs 6,000 annually.
Subscribers are required to contribute at least once a quarter but
there is no ceiling on how many times you invest during the year.
Subscriber will have to bear a penalty of Rs 100 per year of default
and will need to pay it with the minimum amount to reactivate the
account. Also, dormant accounts will be closed when the account value
falls to zero. A friend asked me is there any guarantee? My reply was
No. There is no guarantee since NPS is a defined contribution scheme
and the benefits depend on the amount contributed and the investment
growth up to the time of exit.
At the moment, the Pension Fund
Regulatory and Development Authority (PFRDA) has selected six fund
managers — State Bank of India, UTI, ICICI Prudential, Kotak Mahindra,
IDFC and Reliance — on the basis of a bidding and technical evaluation
process. What happens if someone shift out of the city where he has
taken the NPS? The PRAN remains the same and you can access a toll-free
number (1-800-222080). The details of your PRAN and the statement of
transactions will be available on the CRA website
(www.npscra.nsdl.co.in).
According to me the new pension Scheme is a
good instrument and people who are professionals and working
independently like Journalists ,Advocates, Doctors, Consultants Singers
, Artist, and small business persons may find it useful. It is up to
individual person and his risk apatite whether to buy share or to
subscribe to NPS. We welcome the new scheme, for its risk adjusted
profile.