The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to create a pensioned society in India. In its overall structure NPS is closer to 401(k) plans of the United States.
Unlike traditional financial products where all the functions (sales, operations, service, fund management, depository) are done by one company, NPS follows an unbundled architecture where each step of the value chain has been made disjointed from the other. This unbundling not only allows the customer to mix and match his providers of service through the value chain, picking the best-suited option, but it also curbs the incidence of misselling.
NPS architecture consists of the NPS Trust, which is entrusted with safeguarding subscribers’ interests, Central Recordkeeping Agencies (CRAs) which maintains the data and records, Point of Presence (POP) as collection, distribution and servicing arms, pension fund managers (PFM) for managing the investments of subscribers, a custodian to take care of the assets purchased by the fund managers, and a trustee bank to manage the banking operations. At age 60 the customer can choose to purchase pension Annuity Service Providers (ASP). NPS investors can’t opt for two pension fund managers, neither can switch to another pension fund before a year. The number of pension fund managers (PFM) has increased to 8 in NPS:
- SBI Pension Funds
- LIC Pension Fund
- UTI Retirement Solutions
- HDFC Pension Fund
- ICICI Prudential Pension Fund
- Kotak Pension Fund
- Reliance capital Pension Fund
SBI Pension Funds is the largest pension fund manager (PFM) in India and its current assets under management(AUM) level is Rs 61,000 crore. At Present, Central government employees have no say in the matter of choice of fund manager or investment allocation in NPS, as both are decided by the government. All the NPS contributions of Central government employees are being distributed evenly across three public sector fund managers :LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions.
The current CRAs are the National Security Depository Limited (NCRA) and Karvy Computer Shares Pvt Ltd (KCRA). All the major commercial banks, brokers and Stock Holding Corporation Ltd perform the role of PoP. The subscriber can choose any one of them. There are seven fund managers and eight annuity service providers for subscribers to choose from. The subscriber can choose to invest either, wholly or in combination, in four types of investment schemes offered by the pension fund managers. These are:
- Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks.
- Scheme C (corporate debt) which invests only in high-quality corporate bonds.
- Scheme G (government/Gilt bonds) which invests only in government bonds.
- Scheme A (Alternative Investment)which allows up to 5% (Newly added asset class only for private sector subscriber with active choice)
Alternatively, the subscriber can opt for the default scheme, whereas per the time left to retirement his portfolio is rebalanced each year for the proportion of equity, corporate bonds, and government bonds.
NPS offers two types of accounts to its subscribers:
- Tier I :The primary account, which is a pension account which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts.
- Tier II: In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II account where subscribers with pre-existing Tier I accounts can deposit and withdrawn monies as and when they want. NPS Tier II is an investment account, similar to a mutual fund in characteristics.
The contribution to voluntary savings account (also called Tier-II account) can only be made by the subscriber and not by any third party.
PFRDA has introduced new features to NPS in 2016, including more choices to lifecycle funds:
- Aggressive Life Cycle Fund (LC-75) which allows subscribers equity exposure of up to 75% till 35 years of age. This is more suitable to a 20s investor.
- Conservative lifecycle fund with a 25% starting equity exposure, may be suited to older investors.
- Automatically Lifecycle Fund.
The regulator add a new asset class Alternative Investment Funds (AIF) to the existing menu of equities, government securities and corporate bonds, available on NPS.
Who can join NPS?
A citizen of India, whether resident or non-resident can join NPS, subject to the following conditions:
- The subscriber should be between 18 and 60 years old as of the date of submission of his/her application to the Point of Presence (POP) / Point of Presence–Service Provider-Authorized branches of POP for NPS (POP-SP).
- The subscribers should comply with the Know Your Customer (KYC) norms as detailed in the subscriber registration form.
- Un-discharged insolvent and individuals of unsound mind ucannot join NPS.
Premature withdrawal in NPS before age of 60 years required parking 80% of the sum in an annuity. One can withdraw 20 per cent of the corpus before 60 years but he/she must buy annuity with 80 per cent of the corpus. In 2016, the NPS allowed withdrawal of up to 25% of contributions for specified reasons, if the scheme is atleast 10 years old with certain conditions. You can withdraw the complete amount if the pension collected is less than INR 2,00,000.
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