If you want to save for your leisure, the National Pension System (NPS) can be considered along with other investment options. NPS is basically a long term investment scheme which helps one to manage his savings towards retirement.
How NPS works
After opening an account, you will continue to contribute till the age of 60 or till the maturity of the scheme. At age 60, called the vesting age, you can raise a maximum of 60% (tax-free) of the accumulated corpus, while the balance has to be transferred to a life insurance company to purchase an annuity. There are various pension options for you to choose from, including a lifetime pension, but fully taxable annually or in the year the pension is received.
Now, let’s see what are the options to fund NPS to increase your money. NPS offers a choice to allocate your money between equity (index stock), debt (corporate, state government and central government bonds) or a combination of both. Depending on your risk profile and how many years left in retirement, you can choose a combination of funding options, thus allocating your NPS contributions across equity and debt. You can also choose between ‘Active Choice’ and ‘Auto Choice’, depending on how comfortable you are managing your investment. Maximum equity exposure to NPS for private sector customers is limited to 75% contribution.
The funding options available in NPS are similar to the structure of mutual funds. NPS does not offer a fixed rate of return and is instead a marketable financial instrument. Since its inception, various NPS schemes have generated returns of 9-12.7%, while over the last five years, returns have been in the range of 8.1-13.3% (as of March 31, 2022).
For example, if a 30-year-old person contributes Rs 15,000 per month to NPS, then at the age of 60, the corpus 10% estimate increases to Rs 3.4 crore in annual returns. If the NPS customer prefers to receive an annuity on the entire corpus, at an estimated rate of 6% per annum, the monthly pension amount comes to around Rs. 1.7 lakhs.
Using an NPS calculator, one can determine how much to save after considering inflation and plan the pension accordingly. NPS along with your other investments including Equity Mutual Fund, PPF, EPF can help you create a great leisure kitty.
NPS is suitable for those who do not feel comfortable in choosing the right investment options available in the market. By using NPS as an investment option for saving for retirement, one not only develops the habit of saving but also ensures a stable source of retirement income especially when life expectancy is increasing.
Overall, NPS has many options – from choosing fund options, to how you want to manage contributions, which pension fund manager you want, which pension option you want to choose by paying an annuity. But, since NPS is a long-term investment, there is not such a friendly option to quit in the middle. So, understand the features, functions and life cycle of the scheme before opening and contributing NPS account. Once you become familiar with the features and funding options, you can optimize your NPS account to make it work for you for a lifetime. Knowing them will ensure you the maximum benefit of your NPS account for your golden year.