What is NPS
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
This is the lowest cost self financing Social Security tool. Annual record keeping as well as fund management charges are lowest than any other investment options.
This is the first time that govt has come up with any scheme where you have got the option to take benefit of equities investment which can increase your wealth like geometric progression though it might be risky
A central record keeping agency 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. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.
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%.
Where can people sign up for the NPS?
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.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
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The article offers informations on NPS (New Pension Scheme), a system where individuals fund during their work life, their financial security for old age when they retire from work. Once they join up, they get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
For the first time govt has come up with the lowest cost self financing Social Security tool, where one has the option to be benefitted by equities investment which can increase one's wealth like geometric progression though it might be risky.
It further adds that a central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. And 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.
Great Bonanza for opening NPS account in financial Year 2010-11.... Govt of India will contribute Rs 1000 every year. Dont miss this oppurtunity... afterall you have always paid taxes and never got any cash from our government directly for any transaction. This is the lowest cost investment option ever. Certanily this is a very creative product from Our Government
I have seen the advertisemnt for NPS today in the times of india business, I guess govt is going to be very aggresive in distributing this. I feel this is the best retirement solution and also there is complete transparency as all users will get login ID and password and they can view their account status and also do non financial transactions by the click of the mouse. All citizens of India must go for it.
Swavalamban,the scheme will be available for persons who join the NPS (New Pension Scheme), with a minimum contribution of Rs. 1,000 and a maximum contribution of Rs. 12,000 per annum during the financial year 2010-11, wherein the Governmentof India will contribute Rs. 1,000 per year to each NPS account opened in the financial year 2010-11.
An allocation of Rs. 100 crore has been made for this initiative.
A person can open two types of pension account- with withdrawal and without withdrawal. While a minimum 10 percent would be allowed under withdrawal account, a person will have compulsorily withdraw atleast 40 percent of wealth on retirement (60 years). Balance can be withdrawal as a lump sum or in installments. The scheme envisages that in case of unfortunate death of member any time during the scheme, his or her nominee can opt to receive entire amount of pension wealth in lump sum or nominee can continue with scheme by subscribing to pension scheme in individual name.
The flexibility of investing the savings vest with the investors only. NPS offer two investment options. One is active choice (individual funds) which allow money to be invested in equity, credit risk bearing income instruments and government securities. The auto choice (life cycle fund) provides a mix based on age profile of member. Not only this, the investors can also choose their own fund manager form six options. The default choice would, however be auto choice giving a pre defined portfolio.
NPS is definitely the need of the hour. It provides a compulsory social security to the citizens as prevailing in the developed countries and also scores over other pension schemes in management fees and custodian charges. But the current tax structure (EET) and flexibility can mar the scheme because in NPS the maturity amount is taxed as per the individual income tax slab and the money is locked till the maturity, unlike in other schemes that come with an option to withdraw money. Moreover, interest on the annuity is taxable in the hands of investors as per their income tax slab. It is important for the government to remove these flaws so that more and more people are encouraged to invest in the scheme to protect their future. We hope the FM is listening.
Very recently, the Government has also made tier 2 available to public, which mainly differs from tier 1 in the respect of money withdrawal ability. While tier 1 didn’t have the option to withdraw your money, unless you have a serious reason, tier 2 gives you the ability to withdraw money at any time. So necessarily, the tier 1 is seen as a pension account and tier 2 can be seen as a savings account, but both still serve for retirement benefits.
But note that, an active tier 1 account will be required to open a tier 2 account.
Tier 2 scheme has the following features under its belt:
No limits on the number of withdrawals made
You have the option of appointing a nomination to your account
This is a completely voluntary scheme in which the contributions can be made by POP or POP/SP (point of presence service providers)
You can transfer the savings amount from tier 2 account to tier 1 account any time (but this is not reversible)
To open a Tier 2 account, you must mandatorily have a bank account, your PRAN card (permanent retirement account number) will act as an identification (KYC –Know your customer).
The minimum contribution to be made during the time of account opening is Rs.1000.
For each contribution made there after, the minimum amount should be Rs.250 and that should be made for at least 4 times in a year.
This means that you have to make a contribution of at least Rs.250 four times in a year to keep your account in good condition.
At the end of a financial year, the minimum balance in your account should be Rs.2000 and there is a penalty of Rs.100 if the said balance isn’t maintained or the number of contributions per year is less than 4.
You’ll have the choice of choosing from 6 different fund managements and 3 asset classes (E, C and G).
The Pension Fund Regulatory Development Authority (PFRDA) is taking ing various measures to increase the number of subscribers under its New Pension Scheme (NPS). It is in discussions with the General Insurance Council, various industry bodies and companies to offer the plan to their employees. Under the recent deal between the Indian Banks' Association (IBA) and the pension regulator, all new recruits of banks will join the defined contribution system from April 1, 2010. Already 20 nationalised and 12 private sector banks have joined the new system.
National Aluminium Co (Nalco) was the first public sector entity to join NPS. While 24 per cent of Nalco employees' salary will go towards Employees Provident Fund, 6 per cent will be invested in NPS. PFRDA has written to the department of public enterprises to enable all central public sector undertakings (PSUs) to bring their 1.5 million workers into the NPS fold. Sources said BHEL, NTPC and DVC are next in line to join NPS.
Currently, the scheme has 6.7 lakh subscribers, of which close to 3,000 investors are from the unorganised sector. It has Rs 3,500 crore as assets under management from these subscribers, of which the contribution of the unorganised sector is at Rs 5 crore.
The pension regulator may also provide online application facility from next year. "We are trying to make it available on the central record-keeping agency's website, where investors can log in and make contributions," said a PFRDA official. In yet another move, post offices will now be able to sell NPS. Recently the Department of Posts was given recognition as one of the points of presence (PoPs). PFRDA will soon invite bids from other agencies for recordkeeping. Currently, National Securities Depository (NSDL) is the central record-keeping agency and charges Rs 470 per account. Inspite of keeping other charges such as fund management and PoP quite low, the present CRA charges are quite high, a reason why the regulator seeks to bring competition and reduce costs.
SBI Pension Fund, one of the fund managers under NPS posted the highest net asset value (NAV), followed by UTI Retirement Solutions and LIC Pension Fund. PFRDA had asked the pension fund managers to disclose NAVs on a daily basis from December 1 this year. Of the total Rs 3,700 crore corpus under NPS for government employees, SBI PF manages around Rs 1,700 crore. At present, the allocation of funds among the three fund managers is decided by PFRDA. However, this may change once the PFRDA Bill gets passed in Parliament after which each government employee will have the option of selecting his own pension fund manager.
PFRDA is also launching a small-ticket pension scheme called CRA Lite. The new scheme is mainly aimed at helping self-help groups invest their money in NPS. Under CRA Lite, the minimum annual investment limit would be Rs 2,000, which is lower than the Rs 6,000 per annum for the unorganised sector. The annual record-keeping charges have been brought down to Rs 6570 for CRA Lite.
It recently introduced a savings account - Tier-II account- where investors can enter and exit at will. The account will be available only to those who have subscribed to Tier-I, which an investor cannot exit till the age of 60. Currently, the scheme has 6.7 lakh subscribers, of which 3,000 investors are from the unorganised sector. Of the scheme's total asset under management at Rs 3,500 crore, the contribution of the unorganised sector is at a mere Rs 5 crore.
Costs involved in the scheme
The biggest benefit of NPS compared to any other investment plan or scheme is the minimal cost involved. The very low fee is the biggest advantage of the NPS.
Fund management charge
Compared to the high management fee of most other investment options, the management fee for NPS is peanuts – it is less than 0.01% per annum! Compare this with about 1.75% to 2.25% per year charged by equity mutual funds!
Record keeping fee
The annual record keeping fee for NPS would be just Rs. 280. This is comparable to the annual charges levied by depository participants (DPs).
Transaction fee
Each transaction would cost Rs. 6. Thus, if you make a monthly deposit of say Rs. 2,000, you would be paying Rs. 6 as the transaction fee and the remaining Rs. 1,994 would be invested on your behalf. Compare this with the 2.25% entry load charged by most mutual funds! In this case, you would pay Rs. 45 as the entry load, and only Rs. 1955 would be invested on your behalf.
Overall Impact of Low Charges
The lower charges (especially the recurring management fees) would end up saving you money on an ongoing basis. This would end up making a HUGE difference in the long run due to the effect of compounding.
This thing you have mentioned is too theoritical. it doesnt feel that to invest in nps is a practicl investment. It is only good to read as is very discriptive
if a person has two nps accounts,whether he/she can merge the tier 1 amounts of the two accounts?