Investors in the New Pension Scheme (NPS) should be a happy lot. In the past three years, fund managers of NPS have given more than double returns compared to the Sensex.
For instance, ICICI Prudential Pension Fund (under NPS) has given nine per cent under the 'Auto Choice' category (see table). Similarly, Kotak and SBI Pension Fund's 'C' class have also given 12 per cent in the past three years. The Sensex has returned 4.35 per cent in the same time. And even bettered Public Provident Fund (PPF) returns of 8.5 per cent.
So, for the self-employed who scout for avenues to invest in a pension scheme in the absence of an employee provident scheme, NPS is a good option. At present, their other options are PPF, pension products of life insurance companies, mutual fund houses and NPS. As for PPF, you need to withdraw the corpus as a lumpsum. It will not help you with a regular income like pension products do, unless you buy an annuity with the PPF money or invest the money in regular income schemes like monthly income plans of mutual funds or opt for dividend option in some schemes.
Experts feel NPS scores over PPF and other pension products. Suresh Sadagopan of Ladder7 Financial Advisory Services says PPF is not a substitute for NPS. “The self-employed should consider investing in NPS over and above PPF because unlike PPF, you cannot opt for partial withdrawal of NPS till the age of 60.” Funds accumulated in NPS will help with regular income on retirement.
Pension funds from asset management companies’ stable also works like a retirement fund, that is, helps in accumulation, similar to PPF. The good part being, the accumulated amount is tax-free because of zero long-term capital gains tax on equities.
Two mutual fund houses offer this product as well – UTI’s Retirement Benefit Pension Plan and Templeton’s India Pension. According to Value Research, UTI’s Retirement Benefit Pension Plan has given 9.28 per cent in a year and Templeton's plan has returned 9.13 per cent.
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There is no pension plan from life insurers at present. The biggest disadvantage till now was charges, much higher than any of the products. And, after retirement, one-third of the corpus accumulated through the pension plan can be withdrawn tax-free. The rest of the amount will be used to buy an annuity scheme. The annuity received from this corpus is taxed as income if the total amount from annuity and other sources is more than Rs 2.5 lakh annually.
| ANNUAL RETURNS GIVEN BY VARIOUS FUNDS As on August 10 | ||||
| Asset allocation | 30% Scheme C | 20% Scheme G | 50% Scheme E | Auto Choice for a less than 35-yr investor |
| Avg Return | 11 | 8 | 6 | 8 |
| IDFC Pension Fund | 9 | 7 | 6 | 7 |
| ICICI Prudential Pension Fund | 12 | 7 | 7 | 9 |
| Kotak Pension Fund | 12 | 8 | 6 | 8 |
| Reliance Pension Fund | 8 | 8 | 6 | 7 |
| SBI Pension Fund | 12 | 11 | 4 | 8 |
| UTI Retirement Solutions | 9 | 8 | 8 | 8 |
| Source: Central Recordkeeping Agency (CRA) (Figures in %) | ||||
Says Sadagopan, “Indivi-duals who wish to take a higher equity exposure, can opt for life insurers’ pension funds as there is no cap on the investments they can make in equity.” Typically, NPS invests up to 50 per cent of the corpus in equities and the remaining in corporate bonds and government securities.
In terms of charges and returns, NPS scores. It gives tax benefits, too. If you invest in NPS on your own, you can claim deductions under Section 80C. And, you can claim additional deductions under Section 80CCD(2) if your employer also contributes up to 10 per cent of your basic salary in the scheme. Here, the self-employed might lose out as they won't be able to take the additional benefit.
It also allows withdrawal before the age of 60 of up to 20 per cent of the fund value (NPS Tier-II account). But, you will have to stop investment to be able to do that. So, it will help those planning to retire early. You can buy an annuity with the remaining corpus, which will give regular income. You can continue investing beyond age 60. Then at 70, you can withdraw up to 40 per cent of the fund value and use the rest to buy annuity. The tier-I NPS account (does not allow you to make any withdrawals till age 60) mandates a minimum annual contribution of Rs 6,000.
NPS charges a nominal fund management fee of 0.0009 per cent, far cheaper than any other avenue, says Suresh Agarwal of Kotak Life Insurance. Mutual funds can charge up to 2.25 per cent, life insurers can charge up to 1.35 per cent.
NPS may see a revision in fund management fee to 0.25 per cent by end of this year. An official from one of the pension fund managers says even then NPS will remain the cheapest pension product.