Saturday, November 27, 2010

Explore NPS for good returns on retirement

Explore NPS for good returns on retirement

For the unorganized sector, retirement plans are even more difficult and hence you need to come up with a good strategy to ensure you have your retirement funds in place. This article touches upon the impact of new pension schemes (NPS) introduced by the government and the latest developments that have taken place in retirement plans.

New Pension Scheme (NPS)

What is a NPS? NPS is similar to Mutual funds. You keep aside some money for your retirement and this money is put into the capital market. Hence, the sum which you will get post retirement will be dependent on the performance of capital market. These are managed by fund managers.

Currently 6 fund houses appointed by the government are available under NPS. These are SBI Pension Funds Private Limited, UTI Retirement Solutions Limited, ICICI Prudential Pension Funds Management Company Limited, Religare Pension Fund Limited, IDFC Pension Funds Management Company Limited, and Kotak Mahindra Pension Fund Limited. There are 3 schemes available under NPS which is:
Fund E: If you invest in this fund, then a portion of not more than 50% of your invested money will be put into equity. You should consider investing in this retirement plan only if your risk appetite is high as up to 50% of your money will be linked to the performance of equity.
Fund C: if you invest in this fund, then all of the money will be put into fixed income instruments like corporate bonds and government securities. You should consider investing in this fund if your risk appetite is medium as corporate bonds are not that risky.

Fund G: In this fund, all of your money will be invested in government securities. Hence, this is suited for you if you want it to be an almost risk free investment.

You can choose to invest in any of these funds or you can invest in a mix of these funds. If you are not able to choose between these funds then your contributions will be invested in a fund with 15% in equity, 45% in corporate bonds and 40% in government bonds.

However with increase in age after 35 years, the government bond exposure will increase with a maximum limit of 80% and 10% each in equity and corporate bonds. To ensure you avail the scheme you should compulsorily contribute at least Rs 500 per month.
Amendments Proposed For Workers In Unorganized Sector

The government has proposed to roll out a ‘fixed income pension’ plan to the workers in the unorganized sector. This will be done in three steps. Firstly, the monthly contributions you make will be invested as per NPS guidelines. Secondly, state funds for old age savings scheme will be added to this.

Thirdly, if any gap exists between the sum guaranteed and sum generated from the above two steps then the central government will provide the requisite fund. The new plan will be started off initially in states like Haryana, Karnataka and Andhra Pradesh which are known to be quick in implementing government schemes. However this amendment is only meant for workers in the unorganized sector. Central and State government employees will continue to get pension through NPS.

Tips for Employees
If you are planning to save for your retirement then you should avail NPS as the fund management charges are very low which is 0.0009% compared to 1.5% – 2.5% for mutual fund or insurance products.
Currently, NPS does not offer any tax exemptions unlike other retirement plans. It falls under the category EET (exempt-exempt-tax) system which means that maturity benefits you receive post retirement will be taxable. However, with DTC replacing the current tax code, NPS will be tax exempted upon withdrawal too. Therefore, you should avail this scheme when DTC comes into place.

You can also make weekly contributions in NPS. But for every contribution, your transaction cost will increase. Hence, it is better to keep some money from your monthly compensation and contribute it to NPS once in a month.
As compared to other retirement plans like (Employee provident fund) EPF, the returns are better. Currently, EPF gives 8% interest rate. However, investing in NPS will earn you much better returns because of the equity portfolio of the scheme.

To conclude, NPS should be given serious consideration as a possible scheme for accumulating your retirement funds as it is comparatively a much better scheme in the market currently. It has earned an impressive average return of 19.5% which makes sense of ploughing back some money in the capital market. For the unorganized sector, amendment proposed by the government will ensure you get an assured sum post retirement.

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