Due to the advancement in the medical and health sector, the average life expectancy is increasing. Now you will find that people even after crossing 60 years of age are living quite healthy life. But the retirement age is still the same i.e., 60 years.
Hence life post-retirement becomes tough. After retirement, an individual has very little income and may have to rely on his kids. To help people plan their retirement in a better manner and secure their future Government of India came up with NPS which means National Pension Scheme/System.
National Pension System Investment can help you secure your future after retirement. It is the best choice for retirement planning. In this article, we will understand this in detail about NPS.
What is NPS?
NPS is a retirement pension scheme that was introduced by the Government of India in the year 2004. The main motive behind this scheme is to provide regular income to each Indian after retirement. It is mandatory for government employees whereas private sector employees can invest in it for retirement planning.
There are two types of accounts in NPS. They are Tier 1 accounts and Tier 2 accounts.
- Tier 1 Account
Tier 1 Account is the mandatory account that needs to be opened by anyone who wants to invest in NPS. The government employee has to contribute 10% of their salary to a Tier 1 account. Government too makes an equal contribution.
On the other hand, private sector employees need to contribute initially ₹500 while opening a Tier 1 account. The minimum annual contribution required is ₹1000.
- Tier 2 Account
Tier 2 account is a voluntary savings account. There are no restrictions to withdrawals from this account. But yes you need at least ₹1000 for account opening. The minimum contribution amount is ₹250.
How does the NPS work?
Under National Pension System Investment, you can open two types of accounts. Tier 1 account which is a mandatory account and Tier 2 account which is a voluntary savings account.
You can’t withdraw any amount until you reach the age of 60. When you retire and reach the age of 60, you are allowed to withdraw 60% of the funds from your Tier 1 account. With the remaining 40% of the funds, you need to purchase the annuity plan from registered insurers. This will give you regular income after retirement.
However, you can withdraw 25% of the contribution to a Tier 1 account after 3 years of account opening. This can be done only for purchasing a home, child education or treatment of any critical illness.
Tier 2 account is one type of savings account. There is no limit to withdrawals from this account. You can withdraw the money whenever you want. It is necessary to open a Tier 1 account and then only you can open a Tier 2 account.
NPS Investment can be divided into four different asset classes i.e., corporate bonds, government securities, equities and alternate assets.
The active choice of investment option allows you to divide your portfolio among this asset class as per your wish. Whereas in the auto choice option, your money will be invested in the asset class mentioned above in a pre-defined proportion based on your age.
Investment Options under NPS
NPS allows you to allocate your funds among various asset classes. This can be done in two ways. One is Active choice and another is Auto Choice
- Active Choice
In active choice, you are given the freedom to decide where you want to invest. You can have an option to invest in 4 different asset classes as given below: –
- Equity (E): – You can choose to invest your funds in equity up to 75% of your investment. This gives high returns but also has high risk.
- Corporate Bonds (C): – You can invest in fixed-income instruments.
- Government Securities (G): – You can invest in Government Securities.
- Alternate Assets (A): – Here you can invest in alternate assets like real estate and infrastructure funds. This is a very risky investment so you can invest only up to 5% of your funds.
- Auto Choice
If you don’t opt for “Active Choice” then your investment will be divided into various assets as per a predefined proportion. This proportion is decided based on your age. More funds will be allocated in equity if you are young. As the age increases the allocation to equity decreases and increases in corporate bonds and Government Securities.
Auto choice gives you three options:-
- LC 75 (Aggressive)
- LC 50 (Moderate)
- LC 25 (Conservative)
How to do Retirement Planning with NPS?
Retirement planning is necessary these days. It requires an investment product that can help you get a secured income after you retire. NPS is one such option.
NPS is a Government pension scheme. It is regulated by PFRDA which ensures security and transparency. Through this scheme, you can contribute a small amount every month and start retirement planning.
The sooner you start investing in this scheme, the more the returns. This is because the power of compounding will help you to grow your contributions in huge numbers.
You can start investing in NPS with a small annual contribution of ₹1000.
At the age of 60 when you retire you can withdraw 60% of the amount. The remaining 40% amount can be invested in an annuity plan which will give you a regular pension after retirement.
NPS helps you to create a balanced portfolio. As the funds have the exposure to both equity as well as debt.
It also helps you to create liquid funds for emergencies. This can be done by opening a Tier 2 account which can be used to withdraw funds in an emergency.
Investing in NPS also has tax benefits. The money saved through taxation can be invested back into NPS to get maximum advantage.
There are many options available for retirement planning. But NPS is one of the best choices for retirement planning. It helps in securing your future. After retirement, it gives you a lumpsum amount as well as a regular pension.