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The Pension Bill proposes that National Pension System (NPS) subscriber(s) be allowed to withdraw even from Tier-I account going ahead. Individuals can open two types of NPS accounts. Tier-I is the compulsory account which as of now doesn't allow withdrawals at all. Whereas, Tier-II is optional and allows any number of withdrawals and is usually opened if you have surplus cash. However, you cannot open a Tier-II account unless you have a Tier I account.
The Pension Bill has got passed in both the houses of Parliament, but it is yet to be notified as law.
PFRDA official says, “Tier-II account works just like a savings account as it is very liquid in nature. Subscribers opt for it because withdrawals are not allowed in Tier-I account.”
Any premature withdrawal leads to account closure in NPS. You will be allowed to withdraw only up to 20% from NPS in such a case, whereas remaining should be used to buy annuity. Whereas, on retirement, you could withdraw up to 60% and buy annuity from the rest.
If the Bill gets notified and withdrawals becomes permissible in the Tier-I account, then Tier-II account will attract lesser money than it currently does. This is because most subscribers open Tier-II account only because any number of withdrawals are allowed.
Anil Ghelani, business head and chief investment officer of DSP BlackRock Pension Fund Managers says, "Tier-II account is simply a facilitator for investing surplus cash. This move will definitely attract more money in the Tier-I account than in Tier-II.”
According to the proposed change, "Withdrawals not exceeding 25% 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."
The main purpose of opening a Tier-I account is to accumulate cash and discipline one's investments. If partial withdrawals get allowed, opening a Tier-I account will be sufficient as one will be allowed to withdraw in medical emergencies. This will ensure that, subscribers can focus on accumulating cash at the same time utilising the same money incase emergencies arise.
Investing patterns for subscribers is same for both Tier-I and Tier-II accounts. Hence, it does not make sense to open both the accounts. If you choose the auto choice option, your maximum exposure in equity, corporate bonds and Government securities will be 50, 30 and 20% each. This investing pattern will remain the same even in Tier-I account, if you are an auto-choice investor.
Secondly, you will have to maintain a minimum annual balance of Rs 2,000 for which you will not get any tax benefits.
For instance, the minimum contribution that has to be made towards the Tier-II account is Rs 2,000 a year as against Rs 6,000 for Tier-I account. On opening Tier-I account, an individual can get tax deductions of up to 10% of the basic salary and dearness allowance under Section 80CCD (within the Rs 1-lakh limit, under Section 80C). However, there are no tax benefits to Tier-II account.
Balaram Bhagat, chief executive at UTI Retirement Solutions says, "However, if an individual wants to open a Tier-II account, he could opt for different asset allocations within the available equity classes which will give them an added advantage."
For instance, you may choose to have 100% exposure in government securities in your Tier-I account, whereas 50% can be allocated to equity in the Tier-II account. "Since Tier-II account is highly liquid, they should tweak their asset allocations accordingly. They do so by choosing the active-choice option."
Active choice is where the subscriber can choose his allocation within the asset classes keeping the maximum limits in mind as mentioned above, whereas in case of auto choice, your pension fund manager will allocate money in the assets depending on your age.
