|New Pension System (NPS): |
Pension reform is a major initiative undertaken by the Government of India to provide income security after retirement. The NPS for Govt. employees has been operationalised in 2007- 2008, with the appointment of Pension Fund Manager (PFM), Central Recordkeeping Agency (CRA) and other entities. New Pension System has been made available to all citizens of India from 1st May, 2009.
NPS is a low cost portable Pension System having unique Permanent Retirement Account Number (PRAN) for each subscriber. There are multiple Fund Managers and multiple investment options. There is also provision for mandatory annuitization at the time of exit.
This scheme has been made mandatory for Central Government employees who joined their service on or after 1st January,2004 (except the armed forces). The monthly contribution is 10 percent of the salary and DA to be paid by the employee and matched by the Central Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees.
Individuals can normally exit at or after age 60 years from the pension system. At exit, the individual would be required to invest at least 40 percent of pension wealth to purchase an annuity. In case of Government employees, the annuity should provide for pension for the lifetime of the employee and his dependent parents and his spouse at the time of retirement. The individual would receive a lump-sum of the remaining pension wealth, which subscriber would be free to utilize in any manner. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.
The NPS is a two tier Defined Contribution Pension System.
Tier I: Mandatory non-withdrawable Pension Account mandatory for the central Government employees who have joined services on or after 1st January 2004. The Employees will Contribute 10% of salary & DA and matching 10% will be contributed by the Government to Tier-I Pension account of the employee. Tier-I of the NPS constituting the nonwithdrawable Pension account has become operational for all citizens from that 1st May,2009.
Tier–II: Voluntary withdrawable Savings Account. No contribution will be made by the Government under the Tier-II account for the employees who have joined NPS.
Central Government employees who have joined services on or after 1st January 2004 will Contribute 10% of salary & DA and matching contribution by government.
New Pension System has been made available to all citizens of India from 1st May, 2009.Minimum contribution per instalment is Rs 500 and minimum contribution per year is Rs 6000. There should be a minimum of 4 contributions made each year.
Entry & Exit :
For Government Employees: New Pension System (NPS) has been introduced by the Central Government on 01 January 2004, and is being regulated by Pension Fund Regulatory and Development Authority (PFRDA). This scheme has already been made mandatory for Central Government employees who joined their service on or after 01/01/2004 (except the armed forces). Most of the state governments have also joined NPS for their employees, who joined their service on or after 1st January, 2004.
For All Citizens: New Pension System has been made available to all citizens of India from 1st May, 2009. Subscriber should be a resident Indian. The subscriber age should be between 18 and 55 years on the date of application.
For Government Employees: Under the NPS, an employee will be entitled to exit only at the time of retirement at the age of 60, however at least 40 per cent Pension wealth would be used for purchasing annuity from a life insurance company approved by the IRDA.
For All Citizens: The normal retirement age has been fixed at 60 years. At 60, the subscriber will be required to use at least 40 per cent of accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed but the lump sum benefit has to be availed of before subscriber turns 70 years.
For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but to buy an annuity with the remaining 80 per cent. If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus.
Tax Treatment: Money withdrawn from the scheme will continue to make it liable for tax, although contributions and returns are tax free. Known as the exempt-exempt-taxed (EET) regime, the amount would be taxed at the time of withdrawal. NPS will not attract any Security Transaction Tax (STT) and Dividend Distribution Tax (DDT), with this the yield can be increased to the extent STT and DDT.
PRAN: Under the new pension system, Central Record Keeping Agency (CRA) will be required to maintain subscriber accounts and issue a unique Permanent Retirement Account Number (PRAN) to each subscriber.
Portability: Under NPS, employee’s pension account is portable, when subscriber switches jobs or schemes or fund managers. Investors have the flexibility to choose between fund managers.
Multiple Funds: NPS envisages multiple pension fund schemes with different weightages of securities and Asset Classe .
Entities under NPS Architecture:
NPS is a well structured Defined Contribution Pension system with defined role of various entities.
Operationalisation of New Pension System (NPS)
For Government Employees: New Pension System (NPS) has been introduced by the Central Government on 01 January 2004, and is being regulated by Pension Fund Regulatory and Development Authority (PFRDA). The NPS for Government employees has been operationalised in 2007-08 with the appointment of three (3) Sponsors (LIC, SBI Mutual Fund and UTI Mutual Fund) to manage the funds of New Pension System , & Central Recordkeeping Agency (CRA) and the sponsor entities in turn has formed separate companies for managing the funds of NPS. LIC Pension Fund was sponsored by LIC of India , SBI Pension Fund was sponsored by SBI and UTI Retirement Solutions (P) Ltd has been sponsored by UTI Mutual Fund .
For All Citizens: NPS has been made available to all citizens of India from 1st May, 2009.Six Pension Fund Managers have been appointed to manage the fund under NPS for all citizens . Subscriber should be a resident Indian. The subscriber age should be between 18 and 55 years on the date of application. Any citizen of India desiring to open an NPS account can contact any of the twenty-two (22) Points of Presence (POPs) appointed by PFRDA.
For Govt. Employees: Presently there are two schemes with investment being broadly in Debt and Equity. However during the years 2008-09 and 2009-10 only Scheme I was operational.
Govt.Securities upto 55%
Debt Securities,Corporate Bond/PSU Bonds,etc upto 40%
Equity including equity-linked schemes of Mutual Funds upto 15%
Money Market Instruments upto 5%
For All Citizens:Under the investment guidelines finalized for the NPS, pension fund managers will manage three separate schemes, each investing in a different asset class. The three asset classes are equity, government securities and credit risk-bearing fixed income instruments.
Active Choice :
In case the subscriber does not exercise any choice as regards asset allocation, the contribution will be invested in accordance with the Auto choice option. In this option the investment will be determined by a predefined portfolio. At the lowest age of entry (18 years) the auto choice will entail investment of 50% of pension wealth in "E" Class, 30% in "C" Class and 20% in "G" Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in "E" and "C" asset class will decrease annually and the weight in "G" class will increase annually till it reaches 10% in "E", 10% in "C" and 80 % in "G" class at age 55as in the Table below :
|Age||Asset Class E||Asset Class C||Asset Class G|
|up to 35 years||50%||30%||20%|
The permitted fraction, as mentioned above, is expected to be maintained at that level at all points in time. However, the amount of funds invested in that asset can differ from the Specified weight by no more or less than 5% for purposes of portfolio balancing.
Fund Management and other charges:
NPS is the least cost pension system in India and probably in the world. No where the fund management charges is so low, which has been determined through competitive bidding in a very transparent manner. The following are the charges:
1) Management Fees : 0.0009% p.a. for NPS for Govt employees as well as All Citizens.
2) Custodian Charges : 0.0075% p.a. on asset value in custody.
3) Bank Charges : ( for collection at Non-RBI centres): Rs 15/- per transaction.
3) CRA charges : The CRA charges Rs 50 for opening and Rs 350 annually for maintaining PRAN.
NPS is different from other:
NPS is a technology driven low cost, highly transparent pension system. A very lean team of Regulator PFRDA in charges the system in order to keep the regulator cost at low.
Entire system of NPS is technology driven and all the entities of NPS interconnected.
Selection of Fund Managers, CRA, POPs were done under highly transparent manner through competitive bidding.
Regulation of Asset Allocation aimed at reducing the risk content in the funds by keeping the equity exposure up to 50%.
Mandatory Annutization has been introduced in order to ensure that retirement savings provide regular flow of post retirement income.
Pay out is very flexible having in built provision of Mandatory annuity, Lump sum Withdrawal, Phase Withdrawal (for All Citizens Scheme).