Friday, May 1, 2009

New National Pension Scheme - Review

Pension Fund Regulatory and Development Authority (PFRDA) and Indian Government has come out with new pension scheme (NPS) which will be available to all citizens of India with effect from May 1, 2009. (The government employees were already covered under NPS)

What are the types of accounts?
Under NPS, following two types of accounts will be available to an Indian Citizen (both Resident and NRI):
- Tier 1 Account: Citizen shall contribute your savings for retirement into this non-withdrawable account.
- Tier 2 Account: This is a voluntary savings facility. You will be free to withdraw your savings from this account whenever you wish.
Note: Only Tier 1 account is available from May 1, 2009.


How to enroll in the NPS?
You need to submit the registration form (UOS-S1) to the POP-SP of your choice. The list of POP-SPs is available at the PFRDA website.

NRIs should have an account with a bank based in India to open an account for NPS. The contributions made by the NRI would be subject to regulatory requirements as prescribed by RBI and FEMA.

After the account is opened, you shall recieve a welcome kit containing unique permanent retirement account number (PRAN) card. This account number will be primary means of identifying and operating the account. You will also recieve a TPIN and IPIN to access your account from phone and via internet on this website.


How much does the subscriber need to contribute?
Minimum amount per contribution: Rs 500
Minimum contribution per year: Rs 6000
Minimum number of contributions: 4
You are required to make your first contribution at the time of applying for registration. Over and above the mandated limit of a minimum of 4 contributions, you may decide on the frequency of contributions. You can make the deposit via cash, local cheque or demand draft.


When can a subscriber withdraw the amount?
vesting benefits


















What investment choice does the subscriber have?
- Active Choice: Individual Funds
In this option, you can actively choose how your money is to be invested.
Asset class E - investments in predominantly equity market instruments
Asset class C - investments in fixed income instruments other than Government securities (like corporate bonds etc)
Asset class G - investments in Government securities
You can choose to invest your entire pension wealth in C or G asset classes and upto a maximum of 50% in Asset class E. The subscriber will initially be allowed only one scheme preference/ switch request in May every year.
- Auto Choice: Lifecycle fund
In this option, the investments will be made by in a lifecycle fund. Here the fraction of funds invested across three asset classes will be determined by a pre-determined portfolio based on the age of the subscriber. Refer to the chart below:
asset classes























In case of Auto choice, the first reallocation among the asset classes shall take place on 1st October, 2009 and thereafter on the date of birth of subscriber.


Net Asset Value (NAV) will be released on a regular basis so you may be able to take informed decisions.


Neither the active choice nor the auto choice provide assured returns.


What are the charges?
NPS offers citizens a low cost option for planning their retirement. A 0.0009% fee for managing your wealth makes this the world's lowest cost money managers. Following are the details of the charges:
charge structure


















Annual PRA maintenance charges will be reduced as more account subscription takes place.


Our Viewpoint:
When compared to any other type of investment, the best feature of the NPS is the shockingly low cost. The annual cost of record-keping is Rs 380, each transaction will cost Rs 6 and the most amazing of all—the investment management fee is 0.009 per cent per annum. The magic of compounding over the long time horizon of the NPS means that beneficial impact of the low charges will be magnified massively. Let’s say that there are two individuals, one of whom puts his monthly savings in the NPS and the other in a mutual fund. Let’s further assume that these savings start off at Rs 1000 a month and as the savers' incomes grow, they are able to increase their contributions by 10 per cent every year. The mutual fund charges a load of 2 per cent per investment and the NPS charges a transaction cost of Rs 6 per investment. We are assuming that the investment performance is identical—both are running the same portfolio which gains ten per cent a year. The only difference is that the management expense is 2.25 per cent a year for the mutual fund and 0.0009 per cent a year for the NPS. After thirty years, the mutual fund investor would have Rs 55 lakh and the NPS investor Rs 79 lakh. That's a huge difference, and all of it results from lower costs. The difference would be huge when investment amounts are more than just 1000 per month. There is just one downside - the withdrawls are taxable (which is true even for mutual funds). We believe this is an anamoly and should get corrected in due course of time as competing investments like EPFO are tax free. The NPS is far better than all other pension and retirement schemes offered by Mutual fund and investment houses. We will definately recommend everyone to invest in this as it is regulated by a government body, the costs are low and we expect the returns to be decent. (Atleast everything would be transparent!)


The registration form is attached here. Refer to PFRDA website for more details.


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