Hike in NPS investment management fee need not be a deterrent: Experts

Invest if you want tax benefit and are okay with long lock-in and 40% annuitisation

The Pension Fund Regulatory and Development Authority has permitted pension fund managers (PFMs) of the National Pension System (NPS) to charge slightly higher investment management fees. A new slab-wise fee structure which came into force on April 1, can be charged by PFMs to whom fresh certificates of recognition were issued on March 30.

According to a pension fund industry insider, the hike in fee will enhance the viability of the business for PFMs. The earlier fee of 0.01 per cent (1 basis point, or bps) was too low and the players were making losses, said a source.

Financial planners do not regard the hike as an adverse development that should prevent people from using NPS. “Even the new fee is quite low. Investors will barely notice the difference. It is a graded, slab-wise fee structure. On average, the fee will probably rise from 1 bps to around 3-4 bps,” says Arnav Pandya, founder, Moneyeduschool. 

Adds Deepesh Raghaw, founder, PersonalFinancePlan: “The new fee is fine, so long as the corpus is managed well.”

Equity exchange-traded funds (ETFs) offered by mutual fund houses charge an expense ratio of 0.05-1.08 per cent. Only a few debt ETFs charge 0.05 per cent or less. Index funds (direct) charge 0.05-0.91 per cent, while the regular ones charge 0.3-1.19 per cent. Actively-managed equity and debt funds charge more.

Exclusive tax benefit

Besides the low cost, NPS offers several other advantages. Since premature withdrawal before 60 is difficult, the investor can end up with a hefty corpus at retirement. Asset allocation is taken care of. 

“Those who have the understanding can go for the active choice option, while those don’t can go for the auto choice, wherein their allocation changes based on age,” says Pandya.    

The portfolio is rebalanced on the investor’s birthday. “Left to themselves, most investors don’t rebalance. Also, rebalancing does not create a tax liability in NPS,” says Raghaw.

Annuitisation of 40 per cent of the corpus at 60 ensures investors end up with a pension for life. Investors also enjoy an exclusive tax benefit of Rs 50,000 under Section 80CCD(1B).  

Prepared for a long lock-in?

The long lock-in, however, may not be palatable to people who don’t have adequate investments in other liquid instruments. Some investors may also not like the compulsory annuitisation of 40 per cent of the corpus at 60. People who retire before 60 and want to withdraw will have to put up with 80 per cent of their corpus being annuitised.

What you should do

The changed fee structure should not affect your decision to invest. If you are not keen on the Rs 50,000-tax benefit, have discipline and desire liquidity, you may as well invest for retirement in an index fund with an expense ratio of 5-10 bps.     

Besides the investment management fee, NPS investors have to pay other fees as well. One is the annual maintenance charge levied by the central recordkeeping agency: Rs 95 for National Securities Depository and Rs 57.63 for KFintech. Also, a contribution processing fee has to be paid to the point of presence each time you invest. This is 0.25 per cent of the amount contributed (minimum Rs 20 and maximum Rs 25,000). If you wish to avoid this, open an eNPS account.