The New Pension Scheme is here!

The New Pension Scheme (NPS) has finally arrived. It was opened to the general public on May 1, 2009. I did get a few calls – asking questions like ‘Can I invest in NPS?’, ‘Should I invest in NPS’ and ‘What is NPS?’. Well I guess their initial campaign paid off - the full page color ads and coverage in the television media did what it was supposed to - generate awareness.

So in this blog I will try and bring in a little more clarity for those who are keen to know more about the NPS.

Highlights:
- This is a government-regulated pension plan.
- It is on the lines of ‘401k – retirement plan’ in the US.
- Market consists of equity, corporate bonds and government securities.
- Funds will be actively managed by six AMCs (asset management companies) - Kotak, SBI, Reliance, UTI, IDFC and ICICI Prudential.
- AMCs will make investment decisions under guidelines issued by the Pension Fund Regulatory and Development Authority (PFRDA)
- The investor is free to choose a mix between:
- Equity (E)
- Corporate bonds (C )
- Government securities (G)
- There is a ‘lock-in’ / binding period till the age of 60.
- It is open to anyone (citizen of India, resident or non-resident) between age 18 and 55 years.
- Minimum investment per annum - Rs 6,000. No upper limit.
- Minimum contributions per year are four.

Downsides:
• Returns at maturity are taxable (unlike PPF, EPF)
• There are no guarantees. Returns are market determined
• Costs can be high for those investing the in the region of the minimum amount (per annum) only. Hence it is not a good option for the small saver. The more you invest the more cost-effective it is.
• Maximum limit in equity (E) is capped at 50 percent.

My advice to all those interested is:
• The intention behind the scheme is very good.
• The PFRDA still needs to give some clarifications. Wait till the new government is in place and announces the budget, wherein hopefully it will set to rest all doubts especially on the EET (exempt-exempt-tax) front.
• Don’t rush into investing in the NPS.
• This cannot be your sole investment for retirement. Talk to your Certified Financial PlannerCM before taking the plunge.