How to Plan Your Future Securely With NPS

Introduction

With medical facilities and lifestyle changes average life expectancy which is currently at 70 years, is expected to go up in future. To avoid the longevity risk which is outliving your savings, this necessitates smart retirement planning for individuals who do not want to decline into poverty in their senior years.

Retirement planning requires a careful estimation of future needs, smart savings and investment and prudent financial planning to ensure retirement needs are met. One instrument to consider for retirement planning is the National Pension Scheme (NPS).

What is the National Pension Scheme?

The National Pension Scheme or NPS is a retirement pension scheme launched by the government of India, more specifically the Pension Fund Regulatory & Development Authority (PFRDA), in 2004 to meet the retirement needs of individuals in the country.

It is a mandatory investment for public sector employees while private sector individuals can choose to invest in the same for retirement planning.

Additional read: NPS Features & Benefits you need to know

NPS investments can be done in two types of accounts:

• Tier 1: Tier 1 accounts are mandatory accounts that have to be opened by anyone opting for NPS. Government employees must contribute 10% of their salary to Tier 1 accounts, while the government makes an equal contribution. Private sector employees must contribute a minimum of Rs. 500 when opening the account and have to make an annual contribution of at least Rs. 1,000. There are withdrawal restrictions on this account. However, they are eligible for tax deductions.
• Tier 2: Tier 2 accounts are voluntary accounts that can be opened in addition to Tier 1 accounts. They are highly liquid since they do not have any withdrawal restrictions. The minimum amount per contribution is Rs. 250 and there is no minimum balance requirement.

How does NPS work?

NPS investments are professionally managed funds that divide their contributions between equity and debt products. Investors can choose their allocation. The maximum contribution to equities is capped at 75% to reduce risk.

Contributions to the Tier 1 account are locked in until the investor turns 60 years. After that, 60% of the total funds can be withdrawn as a lumpsum while the remaining 40% has to be compulsorily invested in annuities. This will generate regular pension income according to the terms of the investment.

Investors also get to choose between Active Choice and Auto Choice investments. Under Active Choice, investors get to select their allocation in assets. For investors who are unable to make this decision on their own, the Auto Choice option automatically allocates investments based on the investor’s age.

Advantages of Investing in NPS

• NPS is a flexible investment option in which you get to choose the allocation between equity and debt investments. This ensures you get market-linked returns while your corpus is also protected through debt exposure.
• NPS provides portability across jobs and sectors, which makes retirement planning consistent.
• The investment scheme is regulated by the PFRDA, which means all investments are transparent and well-protected.
• You benefit from the expertise of knowledgeable fund managers.
• NPS subscribers are eligible for tax deductions:

Under Section 80CCD 1:

• NPS subscriber (salaried employees) can claim a deduction on their contribution to NPS of up to 10% of the salary (Basic + Dearness Allowance).
• The self-employed NPS subscribers can claim a tax deduction up to 20% of their gross income or Rs. 1,50,000 whichever is less

Under Section 80CCD (1B):

• NPS subscriber can claim tax deduction on an additional self-contribution upto Rs. 50,000/-

How to Do Retirement Planning With NPS

• Retirement planning requires a stable and secure investment product that will help you save for the future. NPS is a government-sponsored pension scheme regulated by the PFRDA, ensuring that all investments are transparent. You can take advantage of this product to contribute a sum every month as part of your financial planning.
• The sooner you start planning for your retirement, the better. With as little as Rs. 1,000 per year, you can start retirement planning using NPS. The power of compounding will help your corpus grow over time.
• Investing additional sums in the Tier 2 account can help you create a liquid investment pool that you can dip into in times of emergencies.
• You can create a balanced retirement portfolio with NPS since you will get both equity and debt exposure.
• You can also take advantage of the tax benefits from investing in NPS. The money saved on tax can be channelled back into your retirement savings.

Additional read: How to open an NPS account?

Conclusion

The National Pension Scheme can be an excellent investment choice for retirement planning. It can help you create a sizeable corpus that will see you through your golden years when done judiciously. An assured pension income ensures that you get regular income when you retire. Visit ICICI Direct to open an NPS account right away.

Sources

• Senior population to increase to 20% - (Source – The Economic Times as of Apr 17, 2019)