Prioritise retirement security, withdraw from NPS only in emergency

Since access to NPS corpus is restricted, build emergency fund, diversify into equity and debt MFs

The number of requests for partial withdrawal from the tier-1 account of the National Pension System (NPS) saw a sharp spike in the previous financial year. The handbook of NPS Statistics, 2023, published by the Pension Fund Regulatory and Development Authority (PFRDA), reveals that requests rose from 1,46,292 in the 2021-22 financial year (FY22) to 5,32,234 in FY23.

Post-Covid-19 need for funds

The foremost reason for this spike, according to experts, was the Covid-19 pandemic. “Covid-19, and the financial distress it caused to many families, would have been the key reason,” says Sumit Shukla, managing director and chief executive officer, Axis Pension Fund Management.

Abhishek Kumar, a Securities and Exchange Board of India or Sebi-registered investment advisor (RIA) and founder, SahajMoney, says that data from the handbook shows four key reasons: construction or purchase of residential house (3.25 lakh requests), funding a child’s higher education (58,360), medical treatment due to disability (39,464), and medical treatment of specified ailments (33,520).

The pandemic had led many people to defer their goals. Fulfilling these deferred goals would have given rise to the need for funds. Says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers: “During Covid-19, people were unwilling to go to hospitals. So, diagnosis of diseases got delayed, resulting in more critical illnesses coming to the fore in the period after the pandemic. College admissions and children’s weddings may also have been postponed.”

In addition, high inflation could have forced many to use funds intended for these goals to battle rising costs, leading to a shortfall in savings.

Restrictions on partial withdrawal

To ensure that the retirement corpus remains intact, a number of restrictions have been placed on premature withdrawals. “The subscriber can opt for partial withdrawal only three times during his entire tenure of subscription to NPS. A minimum gap of five years must exist between successive withdrawals. The maximum a subscriber can withdraw is 25 per cent of his own contributions,” says Kumar.

Partial withdrawal is permitted for only a few specific reasons: child’s higher education or marriage (including legally adopted child); purchase or construction of a residential house; treatment of specified illnesses and disabilities; to establish one’s own venture; and for skill development.

There are a few caveats. “If a subscriber already owns a house or a flat, either individually or in joint name, which is not an ancestral property, then partial withdrawal from NPS can’t be made for this purpose,” says Dhawan.

Withdrawal should be last resort

Experts warn against withdrawing money from NPS. “Withdraw from NPS only as a last resort, say, for a medical emergency, otherwise you won’t have sufficient corpus left for retirement,” says Shukla.

Kumar suggests saving and investing in advance for goals such as house, child’s education and marriage, etc. “For the treatment of illnesses and to deal with disability, one should buy adequate insurance. Also, maintain an emergency fund,” he adds.

Most families tend to have a less-than-adequate retirement corpus. “Saving for retirement takes a back seat because retirement is considered to be far away. Other more immediate goals take precedence,” says Dhawan. He regards withdrawing from NPS a bad idea. “You can get a loan for your other goals, but retirement can only be funded out of your own savings,” he adds.

People are retiring earlier in many sectors, necessitating a larger corpus for a longer period of retirement. Withdrawing money from NPS also means forgoing the benefit of compounding.

Alternative sources of funding

Since there are many restrictions on withdrawal, one shouldn’t rely on NPS to meet other goals. “Those with significant exposure to NPS, such as government or PSU employees, should first build a robust emergency fund and then increase allocation to liquid investments like equity and debt mutual funds to reduce their dependence on NPS,” says M. Pattabiraman, associate professor, IIT Madras and founder, Freefincal.com.

Subscribers should explore alternative sources of funding before deciding to deplete their NPS corpus. “Meet any short-term cash flow mismatch by taking a loan against fixed deposits or mutual fund units. If you need money for the long term, it is advisable to sell your investments,” says Dhawan.