The low-cost feature makes National Pension System a winner.
A Long retired life, combined with inflation, ‘lifestyle inflation’, and the crumbling joint family system, underscores the necessity of accumulating a retirement corpus large enough to secure the golden years. Rough calculations show that someone with 25 years to go before retirement, would need a retirement corpus of roughly 100 times his current annual household expenses.
Hence the investment product has to be low-cost and capable of generating inflation-beating returns. What are the vehicles available for retirement planning? The government runs schemes such as Employees’ Provident Fund, Public Provident Fund, and National Pension System. Other plans are superannuation funds and life insurance retirement plans.
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National Pension System
The most exceptional feature of NPS is its low cost. Low cost means that investment allocation is maximised, which adds to the final corpus. NPS has delivered superior returns compared to alternatives and inflation, with equity schemes generating approximately 12.7% per annum (p.a) since inception and debt schemes between 9% and 9.6% p.a. Compare these with current interest rates of EPF at 8.1%, PPF at 7.1%, and other small savings schemes between 6.8% and 7.6%.
Another exceptional feature is equity allocation (allowed up to 75%), which helps it beat inflation in the long term. Incremental return of 4-5% p.a. over a long period can make a difference of as much as 30%-60% to the final retirement corpus. Equities at the core of the portfolio (50-75% allocation) as the growth driver, with an allocation to debt (25-50%) for stability, can provide a healthy balance.
Icing on the cake
NPS enjoys ‘E-E-E’ treatment for taxation – exclusive tax benefits for investment, tax-free accruals, and tax-free withdrawals (subject to conditions).Contrast this with EPF for example, which attracts tax if the contribution exceeds defined limits. There is no cap on contribution. It is also portable across employers, transparent and completely digital for account-opening and servicing.
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Some perceived ‘drawbacks’ of NPS are lock-in till retirement and compulsory annuities upon withdrawal. However, these are actually its strengths: lock-in ensures long-term investing for wealth creation, and prevents the corpus from being used up for intermediate goals. Without annuities, it is difficult to plan withdrawals during retirement owing to unpredictability of life.
Annuities transfer the unpredictability to the insurance company, assuring the subscriber of a regular income stream for lifetime. Several improvements have been introduced in NPS recently. A minimum assured returns scheme is expected to be introduced soon. The reality is probably sinking in: there is no substitute for starting early and investing systematically to build a retirement corpus.
For nest egg
* Equities at the core of the portfolio as growth driver, with 25-50% debt allocation for stability, ensures a healthy balance
* Lock-in ensures long-term investing for wealth creation & prevents the corpus from being used up for intermediate goals
The writer is CEO, Kotak Pension Fund
