A layman's guide to the New Pension Scheme

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A layman's guide to the New Pension Scheme

By - Vivek Kaul

On May 1, 2009, the Pension Fund and Regulatory Development Authority (PFRDA) threw open the New Pension Scheme (NPS) to all Indian citizens. Till then, this pension scheme was available only to the central and state government employees.

What is NPS?
NPS is a defined contribution pension scheme open to any Indian citizen between the age of 18 and 55.

What is a defined contribution scheme?
In a defined contribution scheme, the individual invests a certain amount in a pension scheme till he retires. At retirement, he is allowed to either withdraw the money that has accumulated or buy an immediate annuity from an insurance company to generate a regular income, or do both. The option he exercises depends on the way the pension scheme is structured. Buying an immediate annuity assures a regular payment from the insurance company. This payment can be monthly, once every three months, once every six months or once every year.

What do I need to do to start investing in the NPS?
First and foremost, you need to open an account. The form to open an account can be downloaded from http://www.pfrda.org.in/writereaddata/eventimages/Subscriber%20registration%20form%20finalised3969192803.pdf.

This form then needs to be submitted at a point of presence. To find out which is the nearest point of presence for you, check out the following link
http://www.pfrda.org.in/writereaddata/linkimages/POP-%20LOCATION575033432.pdf.

Once the form is submitted and the processing is done, you will be given a permanent retirement account number (PRAM). The PRAM will be the primary means of identifying and operating this retirement account.

How much do I need to invest?
The minimum amount that needs to be invested per contribution is Rs 500. A minimum of four contributions need to be made per year. Other than this, a minimum of Rs 6,000 needs to be invested per year. This means those who plan to invest the minimum amount of Rs 500 need to make 12 contributions per year. There are no upper limits on the amount of money that can be invested as well as the number of contributions that can be made. You need to decide on the frequency of your contributions across the year, at your convenience.

The investments can be made through cash, local cheque or a demand draft at the chosen point of presence.

How will the money be invested?
The money you invest in NPS will be managed by professional fund managers. Currently, you have the choice of picking up one of the following six fund managers: ICICI Prudential Pension Management, IDFC Pension Fund Management, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds, and UTI Retirement Solutions. It is important to remember that at the point of filling up the form, the choice of one of these six pension fund mangers needs to be indicated. The application will not be accepted if this choice is not made.

Can I switch fund managers if I am not happy with my current fund manager?
Yes, you can switch fund managers. PFRDA, the pension fund regulator, will declare the value of your investment every year in April. At that point of time, if you are not satisfied with the performance of your fund manager, you can switch to another fund manager between May 1 and May 15.

Will the money be invested in debt or equity?
The NPS currently offers three investment funds to choose from:
Asset class E: Investments will be made in thirty stocks that constitute the Bombay Stock Exchange Sensex or the fifty stocks that constitute the National Stock Exchange Nifty. The investments in stocks will be made in the same proportion as the weightage of the stock in the particular index. Reliance Industries currently has around 17% weightage in the Sensex, so if Rs 100 is being invested in Asset Class E, that would mean Rs 17 would be invested in the stocks of Reliance Industries.
Asset class G: Investments will be made in debt securities issued by the central as well as the state governments.
Asset class C: Investments will primarily be made in debt securities issued by entities other than the state and central government, liquid funds of mutual funds, fixed deposits of banks etc

At the time of filling the form, you need to indicate what proportion of your money should be invested in which asset class. You can choose to invest a maximum of 50% in the equity option, i.e. asset class E and a maximum of 100% in the other two options.

What if I do not have enough expertise to exercise a choice?
In case you decide not to exercise any choice regarding the asset allocation, the Lifecycle Fund of NPS kicks in. In this case, your age will decide what fraction of your investment is invested in which asset class and as you come become older, your exposure to the equity class will keep coming down (see table).

In fact, for the risk averse, it might be a good option to choose the Lifecycle option, given that exposure to equity decreases as the age of retirement nears.

But NPS gives me only a maximum of 50% exposure to equity...
Many so-called experts have gone to town criticising this aspect. But anybody who has been through the stock market crash last year will agree that betting all investment on equity isn't a great idea, always, especially when you are saving for retirement. PFRDA has also done a great job by limiting investments only in Sensex and Nifty stocks. This is an extremely passive form of investment and has taken active fund management by fund managers totally out of the equation. What this ensures is that you will get a rate of return that is equal to the broader market. You may not get a rate of return that is better than the overall market, but at the same time you will not get a rate of return that is much worse than the overall market.

What if I default on payment?
For every year of default you will have to pay a penalty of Rs 100. This will have to paid along with the minimum amount (i.e. Rs 500) that would be needed to reactivate the account. Also during the period you do not pay, NPS will keep charging its expenses against your accumulated corpus. If you continue to default, the account will be closed as and when the value of the account falls to zero.

Can I withdraw money from the account?
The NPS offers two accounts: tier I and tier II. Currently only tier I account is available. This is a non-withdrawable account and investments in this keep accumulating till you turn 60. Withdrawal is allowed only in case of death, critical illness or if you are building or buying your first house. In case of death the nominee can get 100% of NPS wealth in a lump sum. He can however continue with the NPS in case he wishes to.

Tier II account, on the other hand, will be a voluntary savings account which will allow you to withdraw money as and when you want to. This option is currently not available.

Will I get a tax deduction for the investment?
Yes, under Section 80CCD of the Income Tax Act investments of up to Rs 1 lakh in the NPS can be claimed as tax deductions. Readers should remember that this Rs 1 lakh limit is not over and above the Rs 1 lakh limit available under Section 80C. In fact, the combined limit of investments made under Section 80C, 80CCD and section 80CCC (for investments made into pension plans of insurance companies) is Rs 1 lakh.

What happens at retirement?
NPS by default sets the retirement age at 60. Once you attain that age, you can use the money that has accumulated to generate a regular pension for yourself. In order to do this, you have to compulsorily buy immediate annuity from a life insurance company with 40% of the money that has accumulated. As explained at the beginning, buying an immediate annuity will assure a regular payment for you.

Since a minimum of 40% needs to be used to buy an immediate annuity, a maximum of 60% of the money accumulated can be withdrawn. However, unlike other tax-saving instruments like Public Provident Fund (PPF) and Employees' Provident Fund (EPF), wherein the amount at maturity is tax-free, in case of NPS this amount is taxable.

This is one negative feature of NPS. However, the PFRDA, which is running the NPS, has approached the government to given NPS a tax treatment similar to that for PPF and EPF. Currently, the only way not to pay tax is to buy immediate annuities using the entire amount at maturity, which is not bad because you were anyway accumulating the corpus to generate a pension.

What if I want to withdraw the accumulated amount before I turn 60?
If you want to withdraw the accumulated amount before you turn 60, you need to compulsorily buy immediate annuity with 80% of the money that has accumulated. This is another negative feature of the scheme.

What are the charges?
This is where NPS wins hands down against all other modes of creating a corpus to generate income after retirement. The fund management charge of NPS is 0.0009% of the value of the investment, every year. In comparison, pension plans of insurance companies charge 0.75-1.75% as fund management charge, which is 800-2000 times higher. The other expenses charged are also very reasonable.

Am I guaranteed a certain rate of return?
No return is guaranteed as it is in case of EPF and PPF. The amount of money you make is dependant on how well the fund managers chosen by you perform. But, the extremely low charges in NPS sure give it an edge over the the pension plans of insurance companies.

Are we consciously erring?

Did you know that if you used your PC for five hours a day, you have to pay almost Rs 90 extra in your monthly electricity bill? This might not bother till you realise that it is well over Rs 1,000 a year.

I arrived at this figure by studying the CESC website. I found that the charges are over Rs 5 per unit. This “unit” is called a kilowatt hour (kWh) and is a measure of how much electricity is consumed. A 100-watt (W) light bulb used for 10 hours consumes 1 kWh of power.

You too can find out how much power your appliances consume by going to http://www.cescltd.com/cescyou/powerconsumption/powercosumpnet.php.

Typically most desktop PCs consume around 300W, and that is why your power charges average to around to a little over Rs 5 per unit. Add to this the cost of running your printer, scanner, modem, router and any other accessories you have. Hence it very important to find out the power consumption of the new desktop you are going to buy. Ask your vendor to look at the technical specifications of the PC you want to buy, paying special attention to power consumption.

The table below will give you an idea of how much electricity some PCs consume.

The AMD platform clearly requires more power when idle and the power requirement difference is even larger when it is hard at work. At 210W vs 163.5W, there’s a 28 per cent difference between Intel and AMD. Remember that the results cover all other system components, including motherboards’ voltage regulators and graphic cards and every moveable part.

Clearly, the Mac consumes the least energy although it comes with a very high configuration.

Our PCs, especially the powerful Windows–based PC workstations and ordinary desktops, consume a lot of power even when they are idle (which means the monitor is on screensaver mode and a lot of background work, like indexing, is going on).

Power Management
A little known fact is that a computer draws almost as much power when it is on standby with a screensaver on as it does when in use. By turning off your PC and peripherals when they’re idle, and by employing the little used power management applet, you can cut energy consumption dramatically — 75 per cent or more (if you use your computer six hours a day). And even if you keep your PC on as a server, you’ll save energy by turning off the monitor when you do not need it.

Offices — with over 100 computers — keen on cutting costs, should following the power management scheme and save thousands of rupees in electricity bills.

To get to your computer’s power-management settings in Windows XP, right-click the Desktop and choose Properties—Screensaver. Click the Power button near the Energy Star icon, and select the Power Schemes tab of the Power Options Properties dialog box. For desktop PCs, choose the Home/Office Desk power scheme.

Even if you mean to leave your desk for 5 minutes, I suggest you insert 15 minutes under ‘Turn off monitor’, and for ‘Turn off hard disks’ select 30 minutes. Let’s face it, you will never be back at your desk in 5 minutes!

The Standby and Hibernate options under the Power Schemes tab too are useful for cutting your system’s energy use.

Here are some of my recommendations to save power:

If you use a desktop, use an LCD monitor. They use lot less energy than CRTs.

Turn your computer off when you're done for the day.

Use a Mac. As I mentioned earlier, Macs use much less energy than most Dell or HP or even assembled computers.

Use a power strip, also known as spike buster, so you can easily turn off all your computer accessories at once.

More Power Savers:
More and more builders are shifting to LED (light emitting diode) lamps from regular bulbs and tubelights. Unlike incandescent bulbs or even fluorescent lamps, almost all of the energy used by LEDs is converted to light, rather than heat. LED fixtures still cost more than conventional ones, but the energy savings can help commercial projects pay for themselves in as little as two years.

Even televisions and monitors are shifting to LED displays primarily because of the low power consumption, yet are also giving you the bright lights and vibrant colours you require.

Source: Surit Doss, Business world, may 09 edition

Money has no memory.. Experience has.

“You will never know what the total cost of your education was, but for a lifetime you will recall and relive the memories of schools and colleges. Few years from now, you will forget the amount you paid to settle the hospitalization bill, but will ever cherish having saved your mother's life or the life you get to live with the just born. You won't remember the cost of your honeymoon, but to the last breath remember the experiences of the bliss of togetherness.

Money has no memory.. Experience has.

Good times and bad times, times of prosperity and times of poverty, times when the future looked so secure and times when you didn't know from where the tomorrow will come… life has been in one way or the other a roller-coaster ride for everyone. Beyond all that abundance and beyond all that deprivation, what remains is the memory of experiences.

Sometimes the wallet was full… sometimes even the pocket was empty. There was enough and you still had reasons to frown. There wasn't enough and you still had reasons to smile.

Today, you can look back with tears of gratitude for all the times you had laughed together, and also look back with a smile at all the times you cried alone. All in all, life filled you with experiences to create a history of your own self, and you alone can remember them all.
The first time you balanced yourself on your cycle without support…
The first time she said 'yes' and it was two years since you proposed…
The first cry… the first steps… the first word… the first kiss… all of your child…
The first gift you bought for your parents and the first gift your daughter gave you…
The first award… the first public appreciation… the first stage performance…
And the list is endless… Experiences, with timeless memory…

No denying that anything that's material cost money, but the fact remains the cost of the experience will be forgotten, but the experience never.
So, what if it's economic recession? Let it be, but let there not be a recession to the quality of your life. You can still take your parents, if not on a pilgrimage, at least to the local temple. You can still play with your children, if not on an international holiday, at least in the local park. Nice time to train the employees, create leadership availability and be ready for the wonderful times when they arrive. Hey! Aspects like your health, knowledge development and spiritual growth are not economy dependent.
Time will pass… economy will revive… currency will soon be in current… and in all this, we don't want look back and realize we did nothing but stayed in gloom. Recession can make you lose out on money. Let it not make you lose out on experiences…


If you are not happy with what you have, no matter how much more you have, you will still not be happy.
Make a statement with the way you live your life: How I feel has nothing to do with how much I have.”