India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

National Pension System (NPS) for young investors

, May 4, 2018, 1 Comments

nps-national-pension-systemRetirement planning is the process of setting goals for our retirement years and then creating a plan to fulfil those goals in financial terms. Executing a retirement plan requires most people to put aside some of their current income for long-term savings and investment. It would be prudent to address the same as you start your career, on top priority. One must use tax-sheltered vehicles, such as traditional individual provident fund accounts (PF/ VPF /PPF) and employer pension plans like superannuation along with the NPS (National Pension System), to fund part of your retirement plan with pre-tax corpus.

What is the National Pension system (NPS)?

 The National pension system or earlier known as the New Pension system, originated in the year 2004 in India. It has become a game changer, in the way the pension systems are administered in India. The system moved from the defined ‘benefit’ system into the defined ‘contribution ‘system. The objective was to bring a control on the public finances and managing fiscal deficit. All government staff, joining the government service after 2004 (except the Armed forces), are covered under the New Pension system, which over a period of time has become termed as the National Pension system.

The National pension system is one of the good models that showcases Public – Private participation. It puts in place a delivery of a very valuable financial product for the Indian masses – Pension or old age income and financial security.

Indian masses, except those employed in government services and a very few model corporations, do not have the benefit of a specific allocation towards old age income and security. In addition to this, India as a society, is veering fast towards a nuclear family model with double member earnings. Lifestyle goals and increasing longevity factor due to advancing medical facilities, in addition create unavoidable situations, for providing such coverage of pension requirements.

Benefits for age groups: The NPS is versatile and addresses various demographic groups in terms of age. The following are the age groups across the country and the world at large.nps-national-pension-system-marketexpress-in

Characteristics of this age group A
Less commitments
Low disposable surplus
Discretionary life style expenditures
Long work life period of 38 years

Advantages of NPS with respect to the group A- Young Investors

Do it yourself model and account opening
The NPS is a ‘do it yourself’’ model based on very low entry barriers. It can be established easily on an online model using the Aadhaar using technology infrastructure. It takes 15 minutes to set up an NPS account. It makes the first time YOUNG user to understand financial planning terminologies to be used for other financial goals

Benefits of Compounding
Compounding is the 8th wonder of the world. In an investment period spanning 38 years, Preparing for the last financial goal of your life, at the time of entering the workforce, would create a large corpus. A young person can stop investing for retirement after a certain point of Invested time.

Equity asset class
NPS invests aggressively in EQUITY as an asset class with varying levels of participations and mix of asset class at a young age. A young subscriber can invest in Equities indirectly up to 75% of the total portfolio which can lead to mind boggling retirement wealth.

The NPS account is flexible in most of the areas covered. Systems modify the pension fund manager, fund allocation with the least intervention and on the technology backbone.

The NPS costs are the lowest in the country when compared to the other investment products due to the adoption of technology and best practices code established by the regulator PFRDA

Taxation Benefits
Over a period, Individuals young or old become assessed to tax. Tax cannot be avoided,  but can be planned in advance due to various exemptions and deductions. The NPS offers substantial tax benefits under section 80CCD of the Income tax act in India.

One of the most important safety feature is regulation and protection to all the subscribers by various regulations and best practices with constant monitoring. The NPS meets all this criterion and hence a very useful product for all the young people.

The opinions expressed in this article are the author’s own and do not reflect the view of MarketExpress – India’s first Global  Analysis & Sharing Platform or the organization(s) that the author represents in his personal capacity.

  • You are missing out on the main issue with NPS in your analysis which is the lock in period and the subsequent compulsory purchase of annuity which will erode the post-retirement returns.