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Overview & Understanding
The Government of India authorized Pension Fund Regulatory and Development Authority (PFRDA) to extend New Pension System (NPS) on a voluntary basis to all citizens of India. It is one of the significant social security measure introduced by the Government of India.
Pension Fund Regulatory and Development Authority (PFRDA) is the prudential regulator for the NPS. PFRDA was established by the Government of India on 23 August 2003 to promote old age income security by establishing, developing and regulating pension funds. PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the functions of the PFMs. The NPS Trust is composed of members representing diverse fields and brings wide range of talent to the regulatory framework
ISSL has been appointed as a Point of Presence (POP) to act as the customer interface for non-government subscribers / individual citizens who wish to open Permanent Retirement Account (PRA) with Central Record Keeping Agency (CRA) for the purpose of subscribing to the NPS
- To provide old age income
- Reasonable market based returns over the long term
- Extending old age security coverage to all citizens.
- It is voluntary - NPS is open to every Indian citizen. You can choose the amount you want to set aside and save every year.
- It is simple - all you have to do is open an account with any one of the POP and get a PRAN.
- It is flexible - You can choose your own investment option and Pension Fund and see your money grow.
- It is portable - You can operate your account from anywhere in the country, even id you change your city, job or your pension fund manager.
- It is regulated - NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
- It is economical - NPS offers Indian citizens a low cost option for planning their retirement. A 0.0009% fee (based on assets under management) for managing your wealth makes pension funds under NPS the world's lowest cost money managers.
1. What is retirement planning and how to ensure an independent life even when one retires from active work life?
Retirement planning involves disciplined saving, vigilant investment to build a sufficient retirement corpus and its judicious drawdown in the post-retirement phase. This is achieved by joining a pension/retirement plan at an early stage in one’s life so that when a person retires from active work life, he gets a regular stream of income in the form of pension or annuity for his life.
2. What are the pension plans available in India?
National Pension System (NPS) which is administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA) created by an Act of Parliament. Besides the NPS, some mutual funds and insurance companies also offer Pension plan or retirement plan, which are not under the jurisdiction of PFRDA. Apart from this the normal retirement plan options include EPFO, Retirement gratuity etc. is offered by employers to their workers and employees.
3. What is National Pension System (NPS)?
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.
- Under the NPS, individual savings are pooled in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
- At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empanelled life insurance company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.
4. What are the advantages in joining NPS?
- Flexible - NPS offers a range of investment options and choice of Pension Fund Manager (PFMs) for planning the growth of your investments in a reasonable manner and see your money grow. Individuals can switch over from one investment option to another or from one fund manager to another subject, of course, to certain regulatory restrictions. The returns being totally market-related.
- Simple – Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:
- Tier-I account : This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.
- Tier-II account : This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
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Portable - NPS provides seamless portability across jobs and across locations, unlike all current pension plans, including that of the EPFO. It would provide hassle-free arrangement for the individual subscribers.
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Regulated - NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.
The NPS is a sophisticated innovation that is based on the world's best practices in the pension sector.
- NPS is based on Personal retirement accounts (PRAs) created for individual members. NPS accumulates savings into subscriber's PRA while he is working and use the accumulations at retirement to procure a pension for the rest of his life.
- NPS architecture consists of NPS Trust which is entrusted with safeguarding subscribers interests, a Central Recordkeeping Agency (CRA) which maintains the data and records, Point of Presence (POP) and aggregators as collection and distribution arms, competing pension fund managers for generating and maximizing returns on investments of subscribers, custodian to take care of the assets purchased by the Fund managers and Trustee bank to manage the banking operations.
- NPS has an unbundled Architecture, with inbuilt checks and balances, where each function is performed by a different entity which is renowned in its area, to achieve maximum operational efficiency and at a low cost.
- NSDL is acting as Central Record Keeping agency (CRA) which is associated with various national level projects for recordkeeping functions.
- Renowned Financial Institutions covering Public/Private Sector Banks, NBFC, etc., acting as POPs and Aggregators .
- Funds are managed by professional Fund Managers from Public & Private sector with proven track record and as per the PFRDA approved investment guidelines. At present there are 8 pension fund managers managing the pension wealth of subscribers. They are :
- HDFC Pension Management Co. Ltd **
- ICICI Prudential Pension Fund Management Co. Ltd.
- Kotak Mahindra Pension Fund Ltd.
- LIC PensionFund Ltd.
- Reliance Capital Pension Fund Ltd.
- SBI Pension Funds Pvt. Ltd
- UTI Retirement Solutions Ltd
- Pension Fund (PF) to be incorporated by Birla Sunlife Insurance Co. Ltd
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Types of Accounts
Tier I Account This is a non withdrawable account to which the Subscriber shall contribute his/her savings for building a retirement corpus.
- Available to every citizen on a voluntary basis (between 18 – 65 years of age)
- To provide old age income through systematic savings from the day you start your employment
- Seeks to inculcate the habit of “saving for retirement” amongst the citizens
- Reasonable market based returns over the long term
- Flexibility to switch Investment options as well as pension funds
- Facility for seamless portability and switch between Pension Fund Managers
- Account can be operated from anywhere in India
- Minimum amount per contribution is Rs.500/- and minimum contribution per year is Rs.6000/-
- Minimum 4 contribution to be made by the subscriber in a year
- On attaining the age of 60 years, the subscriber will be required to compulsorily annuitize at least 40% of the pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner
Tier II Account This is a voluntary savings facility which provides liquidity to subscribers i.e Subscribers will be free to withdraw their savings from this account whenever they wish.
- Voluntary saving facility
- Tier I account is a pre-requisite for having a tier II account
- Investment of tier I as well as tier II contribution under same PRAN
- Minimum amount for activation – Rs.1000/-
- Minimum amount for regular contribution – Rs.250/-
- Minimum yearly tier II account balance – Rs.2000/-
- No restriction in withdrawal. Subscriber can withdraw any amount at any point of time from tier II account
- Facility to shift funds from tier II to tier I account
- Facility to provide separate bank account, scheme preference and nomination details
- Facility to have separate fund manager for tier I and tier II account
- No additional AMC
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Investment options
Under NPS, how the money is invested will depend upon subscriber’s own choice. NPS offers a number of funds and multiple investment options to choose from. In case subscriber does not want to exercise a choice, his/her money will be invested as per the Default choice of “Moderate Life Cycle Fund” under "Auto Choice" option, where money will get invested in various type of schemes as per subscriber’s age. The NPS offers two approaches to invest subscriber’s money:
Individual Funds (Asset Class E, Asset Class C, and Asset Class G and Asset Class”A” )
Subscriber will have the option to actively decide as to how his/her NPS pension wealth is to be invested in the following three options:
- Asset Class E - Investments in predominantly equity market instruments.
- Asset Class C - investments in fixed income instruments other than Government securities.
- Asset Class G - investments in Government securities.
- Asset Class A - Investment in Alternative Investment Schemes including instrument like CMBS, MBS, REITS, AIFs, InvIts etc.
Subscriber can choose to invest his/her entire pension wealth in C or G asset classes and up to a maximum of 50% in equity (Asset class E) and upto a maximum of 5% in asset class “A”. Subscriber can also distribute his/her pension wealth across E, C, G and A asset classes, subject to such conditions as may be prescribed by PFRDA.
- Lifecycle Fund
NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments. In case subscribers are unable/unwilling to exercise any choice as regards asset allocation, their funds will be invested in accordance with the Auto Choice option.
In this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per age of subscriber), with the investment in E decreasing and in C & G increasing with the age of the subscriber.
Three Life Cycle funds are available under this Auto Choice :
- (i) LC75 – Aggressive Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 75% till age 35 and gradually reduces as per the age of the subscriber.
- (ii) LC50 - Moderate Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 50% till age 35 and gradually reduces as per the age of the subscriber.
- (iii) LC 25 - Conservative life cycle fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 25% till age 35 and gradually reduces as per the age of the subscriber.
The default auto choice if the subscriber is not choosing any of the above option is Moderate life Cycle Fund.
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Contribution guidelines
The subscriber can contribute the amount through cash, local cheque, demand draft or Electronic Clearing System (ECS) at his/her chosen POP-SP or he has the option to contribute through eNPS platform by net banking, debit card or credit card. However, for cash transactions exceeding Rs.50000/- subscriber needs to submit the copy of the PAN card as per the Anti-Money laundering (AML) rules. Also, No outstation cheques shall be accepted.
- Minimum contribution at the time of account opening and for all subsequent transactions- Rs 500
- Minimum contribution per year - Rs 1,000 excluding charges and taxes
- Minimum number of contributions in a year - 01
- If the subscriber contributes less than Rs. 1,000 in a year, his/her account would be frozen and the facilities provided by CRA such as online view of account etc. will be restricted.
- In order to reactivate the account, the subscriber would have to pay the minimum contributions of Rs. 500/-
- A frozen account shall be closed when the account value falls to zero.
- Minimum contribution at the time of account opening - Rs.1000/- and for all subsequent transactions a minimum amount per contribution of Rs.250/-
- There is no minimum contribution requirement for the financial year and also there is no cap on maximum contribution
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Withdrawal
At least 40% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity providing for monthly pension to the subscriber and balance is paid as lump sum payment to the subscriber. In case the total accumulated corpus is less than Rs. 2 Lacs, the subscriber may opt for 100% lumpsum withdrawal.
However, the subscriber has the option to defer the lump sum withdrawal till the age of 70 years. Subscriber has also got the option to continue contributing upto the age of 70 years. This option is required to be exercised upto 15 days prior to completion of 60 years.
The subscriber may exit from NPS before attaining the age of 60 years, only if he has completed 10years in NPS. At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity providing for monthly pension to the subscriber and the balance is paid as a lump sum payment to the subscriber.
In case the total accumulated corpus is less than Rs. 1 Lac, the subscriber may opt for 100% lumpsum withdrawal
In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum. However, if the nominee wishes to continue with the NPS, he/she shall have to subscribe to NPS individually after following due KYC procedure
Under National Pension System, PFRDA has entrusted the responsibility of receiving, processing and settlement of all withdrawal claims made to Central Recordkeeping Agency (CRA) and CRA has created a special NPS claim processing cell (NPSCPC) for this purpose for handling all types of withdrawal claims. The CRA will monitor the performance of NPSCPC on the withdrawal processing as per the instructions provided by PFRDA in this regard. At present the NPSCPC is fully functional.
The subscribers can submit their claims online for withdrawal from NPS
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