All about the New Pension Scheme

The scheme has been in the pipeline for at least five years but it finally took shape in 2007-08. Although the government was pushing for the scheme after a law providing statutory backing to the regulator was enacted, the Left parties, which were supporting the United Progressive Alliance government, did not allow the passage of the Bill.

So, last year, the government decided to go ahead by allowing the NPS Trust to enter management agreements with fund managers. What benefits does the NPS offer? Who is eligible? Business Standard provides a ready-reckoner.

Who can join the New Pension Scheme?

Any Indian citizen between 18 and 55 years. At present, only tier-I of the scheme, involving a contribution to a non-withdrawable 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Subsequently tier-II accounts, which permit voluntary savings that can be withdrawn at any point of time, can be opened.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.

How do I enrol?

You 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.

How much can I invest?

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.

What is the penalty for failure to make the minimum payment?

You 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.

Are my investments guaranteed?

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.

How should I select my investment option?

You can choose the investment mix between equity or E (high risk but high returns), mainly fixed income instruments or C (that come with medium risk and returns) and pure fixed investment products or G (which offer low returns but have very low risks associated with them). Equity investment is capped at 50 per cent.

At present, the equity investment consists of index funds that replicate the Sensex or Nifty portfolio. The C segment includes liquid funds, corporate debt instruments, fixed deposits and public sector, municipal and infrastructure bonds. The pure fixed investment instruments include state and central government securities.

There is a trade-off between risk and returns, with a younger investor placed better to take risks.

If you are unable to decide the investment mix, the default option will kick in.

What is the default option?

The default option, called auto choice lifecycle fund, will see the investment mix change according to the age of the subscriber. At the lowest entry age of 18 years, auto choice entails an investment of 50 per cent in E, 30 per cent in C and 20 per cent in G.

The ratios will remain unchanged till the subscriber turns 36, when the ratio of investment in E and C will decrease annually, while the proportion of G rises.

By the time the subscriber is 55 years, G will account for 80 per cent of the corpus, while the share of E and C will fall to 10 per cent each.

Who will decide the fund manager?

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.

You have to select one fund manager at the time of deciding your investment option; later, PFRDA may allow subscribers to choose more than one fund manager.

Can I change my investment mix and the fund manager? You can shift from one fund manager to another from May 2010.

What happens if I relocate to another city?

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).

How can I exit the scheme?

The normal retirement age has been fixed at 60 years. At 60, you will be required to use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed but the lump sum benefit has to be availed of before you turn 70 years.

For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but buy an annuity with the remaining 80 per cent.

If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus. Alternatively, a subscriber can exit if the account value falls to zero or if the citizenship status changes.

The age of exit will be reviewed by PFRDA from time to time. There will also be the option to select an annuity that will pay a survivor pension to your spouse.

Are there tax benefits for NPS?

At present, the investment is covered under section 80CCD of the Income Tax Act and a tax will be levied if you withdraw the money.

You can avoid paying tax by transferring the entire corpus to the annuity service provider. PFRDA has, however, approached the government to treat investment in NPS on a par with instruments like Employees Provident Fund and Public Provident Fund, for which no tax is levied at the investment, accumulation or withdrawal stage.

More On NPS

National Pension Scheme (NPS)*

On 1st May 2009, the Government has launched a National Pension Scheme(NPS), a system in which money invested in the pension fund will come back partly as lump sum and rest as annual pension. It will give options of deciding the extent of risk an investor wants to take.

The fund can be invested in three kinds of assets equity, government bonds and corporate bonds. Investment in equity is subject to two significant riders it cannot be more than 50% of the amount in the investors account and fund managers cannot invest in shares of individual companies, but only in index funds linked to the BSE’s sensex or the NSE’s Nifty.

A central record keeping agency - NSDL will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure.

These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.

People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to

another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.

URL:http://economictimes.indiatimes.com/Personal-Finance/Savings-Centre/Savings-News/Frequently-asked-questions-on-new-pension-scheme/articleshow/4472238.cms

Following are the frequently asked questions on the new pension scheme (NPS) launched Friday for all eligible citizens between 18 and 55 years of age:

Q. Who shall be responsible for protecting my interests as a NPS subscriber?

A. The Pension Fund Regulatory and Development Authority, the regulator, will protect your interest.

Q. What is the process for enrolling in NPS?

A. Eligibility: 18-55 years of age. Upon registration, you will receive a permanent retirement account number. Minimum annual contribution is Rs.6,000. The minimum number of instalments per year is four. There is no upper limit on the contribution per instalment or on the number of instalments.

Q. Would my personal information be confidential?

A. Yes.

Q. Under what circumstances can my account be closed before attaining retirement age?

A. The account would be closed under following circumstances: death, account value reduces to zero and change in citizenship status.

Q. Can I exit before attaining the age of 60 years?

A. Yes provided you annuitise at least 80 percent of your pension corpus.

Q. What if I do not exit the system at or before 70 years?

A. In that case, on attaining 70 years, your account would be closed with the benefits transferred to you.

Q. Can someone else make contributions on my behalf?

A. Yes.

Q. What would be the penalty in case I am unable to contribute the minimum annual contribution?

A. You would have to bear a default penalty of Rs.100 per year of default and the account would become dormant. In order to re-activate the account, pay the minimum contributions, along with penalty due. A

dormant account will be closed when the account value falls to zero.

Q. Are there any investment returns guarantees?

A. No. NPS is a defined contribution scheme and the benefits would depend upon the amounts contributed and the investment growth up to the point of exit from NPS.

Q. Will I be permitted to select more than one pension fund to manage my savings?

A. You have to select only one fund. However, the regulator may allow the subscribers to choose more than one fund in future.

Q. What if I do not select any investment option?

A. All your contributions would be channeled into a life-cycle fund.

Q. What are the risks of investing in NPS?

A. As with every investment, there is a degree of risk under NPS also. The value of your investment in NPS may rise or fall.

Q. I am 30 years old and would like to retire at 60. I want a pension of Rs.2,000 per month at today's prices when I retire. How much do I need to contribute?

A. You would need a pension wealth of Rs.319,000 (at today's prices) at the age of 60 to get a pension of Rs.2,000 per month. To realise this, you would need to contribute approximately Rs.16,600 every year.

Q. What will happen to my savings after I retire at 60?

A. You will have to compulsorily invest a minimum of 40 percent of your pension wealth to purchase a life annuity from an IRDA-regulated life insurer

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The remaining pension can be withdrawn in lump sum or in a phased manner.

Q. What will happen to my savings if I decide to exit NPS before the age of 60?

A. You would be required to invest at least 80 percent of your pension wealth to purchase a life annuity from any IRDA-regulated life insurer. The remaining 20 percent may be withdrawn as a lump sum.

Q. Will the annuity also provide for a family (survivor) pension?

A. Yes, you will have an option of selecting an annuity which will pay a survivor pension to your spouse.

Q. On my death, can my nominee continue to operate the account in my name?

A. No, the balance standing to the subscriber's account may be transferred to the nominee's account after following regulator KYC procedure.

Q. Can I opt not to exit in case of disability?
A. Yes.