 "NPS set to become more attractive")
The National Pension System (NPS) might soon gain more popularity. Last week, the Pension Fund Regulatory & Development Authority (PFRDA) Bill was cleared in both Houses of Parliament, though it's yet to be notified.
Vineet Agarwal, director, KPMG-India, says, "The pension Bill being passed is not enough. If the proposed changes are implemented, it will definitely give a good push to NPS."
The Bill has proposed changes such as assuring minimum guaranteed returns and allowing subscribers to withdraw from tier-I accounts. These, if implemented, would make NPS more attractive.
Withdrawals from tier-I a/c
Experts say if implemented, this would be the most significant change. The Bill has proposed allowing NPS subscribers to withdraw up to 25 per cent from NPS tier-I accounts. According to the proposed change, "Withdrawals not exceeding 25 per cent of the contribution made by the subscriber may be permitted from the individual pension account, subject to conditions such as purpose, frequency and limits, as may be specified by regulations."
However, this would be allowed only in medical emergencies.
Anil Ghelani, business head and chief investment officer, DSP BlackRock Pension Fund Managers, says, "It could be made permissible only for emergencies and up to a certain threshold of the corpus accumulated. For instance, the Employees' Provident Fund Organisation allows withdrawals for specific reasons. Detailed guidelines and mechanism would have to be in place to make such a facility work."
Currently, one isn't allowed to withdraw any amount from tier-I accounts; if somebody wants to withdraw money, he/she can do so only from tier-II accounts that have to be opened separately, after tier-I accounts are opened.
Here, too, there are restrictions. For instance, on retirement, you could withdraw up to 60 per cent and buy annuity from the rest. However, if the withdrawal is premature, only 20 per cent can be withdrawn, while 80 per cent has to be kept invested.
Financial planners say while the proposed move would provide flexibility to subscribers, it would also affect disciplined investments. This is because the primary purpose of letting subscribers accumulate cash in tier-I accounts would be defeated. Also, subscribers would be taxed for such withdrawals, and this wouldn't work to their benefit.
Minimum assured guarantee
Sandeep Shrikhande, chief executive of Kotak Pension Fund, says, "For this change, the regulator may have to introduce either NAV (net asset value)-based products or make changes in the current products." Clarity on this matter is expected only once the procedure is finalised and the regulator informs pension fund managers about this.
The pension Bill says a subscriber can opt to invest in schemes providing minimum assured returns.
"There is more clarity required on this part," said Ghelani of DSP BlackRock. Clarity is essential because as of now, it isn't known whether PFRDA would float separate products that would assure a minimum guarantee or link these directly to the performance of individual pension fund managers."
However, this has a flip side. Fund managers wouldn't have enough flexibility and the returns would be similar to a debt product, as is the case with a pension product offered by the life insurers. Therefore, as a product, NPS would lose it uniqueness.
Another official from the industry said the limit for investment in equities might be changed - it might be raised to as high as 100 per cent. Currently, the limit is only 50 per cent, while one can opt to invest 100 per cent in either corporate bonds or government-securities. However, somebody choosing the 'active' option can choose to have 100 per cent exposure to one such asset class vis a vis the 'auto' choice through which the subscriber's money is automatically allocated to asset classes based on his age. Asset allocation changes every year once a subscriber is 36.
One can shift from 'auto' to 'active' option and vice-versa once a year. NPS subscribers can also switch between pension fund managers once a year.
"To execute these switches, the subscriber would be charged a nominal processing fee of Rs 20-30," said Shrikhande of Kotak Pension Fund. To open an NPS tier-I account, you would have to contribute Rs 6,000 a year; for tier-II accounts, the contribution has to be Rs 2,000 a year.
Vineet Agarwal, director, KPMG-India, says, "The pension Bill being passed is not enough. If the proposed changes are implemented, it will definitely give a good push to NPS."
The Bill has proposed changes such as assuring minimum guaranteed returns and allowing subscribers to withdraw from tier-I accounts. These, if implemented, would make NPS more attractive.
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Withdrawals from tier-I a/c
Experts say if implemented, this would be the most significant change. The Bill has proposed allowing NPS subscribers to withdraw up to 25 per cent from NPS tier-I accounts. According to the proposed change, "Withdrawals not exceeding 25 per cent of the contribution made by the subscriber may be permitted from the individual pension account, subject to conditions such as purpose, frequency and limits, as may be specified by regulations."
However, this would be allowed only in medical emergencies.
Anil Ghelani, business head and chief investment officer, DSP BlackRock Pension Fund Managers, says, "It could be made permissible only for emergencies and up to a certain threshold of the corpus accumulated. For instance, the Employees' Provident Fund Organisation allows withdrawals for specific reasons. Detailed guidelines and mechanism would have to be in place to make such a facility work."
Currently, one isn't allowed to withdraw any amount from tier-I accounts; if somebody wants to withdraw money, he/she can do so only from tier-II accounts that have to be opened separately, after tier-I accounts are opened.
Here, too, there are restrictions. For instance, on retirement, you could withdraw up to 60 per cent and buy annuity from the rest. However, if the withdrawal is premature, only 20 per cent can be withdrawn, while 80 per cent has to be kept invested.
Financial planners say while the proposed move would provide flexibility to subscribers, it would also affect disciplined investments. This is because the primary purpose of letting subscribers accumulate cash in tier-I accounts would be defeated. Also, subscribers would be taxed for such withdrawals, and this wouldn't work to their benefit.
Minimum assured guarantee
Sandeep Shrikhande, chief executive of Kotak Pension Fund, says, "For this change, the regulator may have to introduce either NAV (net asset value)-based products or make changes in the current products." Clarity on this matter is expected only once the procedure is finalised and the regulator informs pension fund managers about this.
The pension Bill says a subscriber can opt to invest in schemes providing minimum assured returns.
"There is more clarity required on this part," said Ghelani of DSP BlackRock. Clarity is essential because as of now, it isn't known whether PFRDA would float separate products that would assure a minimum guarantee or link these directly to the performance of individual pension fund managers."
However, this has a flip side. Fund managers wouldn't have enough flexibility and the returns would be similar to a debt product, as is the case with a pension product offered by the life insurers. Therefore, as a product, NPS would lose it uniqueness.
Another official from the industry said the limit for investment in equities might be changed - it might be raised to as high as 100 per cent. Currently, the limit is only 50 per cent, while one can opt to invest 100 per cent in either corporate bonds or government-securities. However, somebody choosing the 'active' option can choose to have 100 per cent exposure to one such asset class vis a vis the 'auto' choice through which the subscriber's money is automatically allocated to asset classes based on his age. Asset allocation changes every year once a subscriber is 36.
One can shift from 'auto' to 'active' option and vice-versa once a year. NPS subscribers can also switch between pension fund managers once a year.
"To execute these switches, the subscriber would be charged a nominal processing fee of Rs 20-30," said Shrikhande of Kotak Pension Fund. To open an NPS tier-I account, you would have to contribute Rs 6,000 a year; for tier-II accounts, the contribution has to be Rs 2,000 a year.