Thursday, March 5, 2009


Its been a long wait for all those who waited for a genuine "pension scheme" in India where they could invest for their retirement. There was no such option available and the only option was the pension plans offered by insurance companies which are not a genuine pension plans. They are at best Ulips offering annuity payments at the end of maturity. In absence of anything better, it was being passed off as a pension plan. But bot anymore, coz now from April 2009 , for the first time individuals in India will have an option to invest in the New Pension Plan being sold by various POPs.
This is open to everyone .This will be managed by fund managers appointed by Govt of India. What is so exciting about this plan?? How is it really different from the "pension plans"offered by insurance companies?? Does it compare well with the mutual funds which have low charges??
Lets try and examine the product on the basis on these questions.
1. Who is eligible to invest?
Like I mentioned earlier, everyone including you and me is eligible to invest in this plan. Self employed, salaried , central govt employees everyone.
2. Who will manage the pension fund?
There will be fund managers specially appointed by GOI to manage this fund.
3. Where will this fund invest?
This fund will invest in equities, debt , govt securities etc. In that sense this is similar to other products available.
4.What are the charges?
This is the clincher for this product as the charges for New Pension Scheme(NPS) is ridiculously low. The annual record keeping cost would be just Rs 380, Rs 6 only for each transaction (transaction cost is fixed and not based on percentage of the money invested, thereby saving lot of money) and the annual fund maintenance charges are just 0.009 % pa(thats it).
5. How does low charge benefit us?
Low charges on your invested corpus over a long period of time have huge impact due to the effect of compounding. For instance, Let's say that there are two individuals, one of whom puts his monthly savings in the NPS and the other in a mutual fund. Let's further assume that these savings start off at Rs 1000 a month and as the savers' incomes grow, they are able to increase their contributions by 10 per cent every year. The mutual fund charges a load of 2 per cent per investment and the NPS charges a 'load' (transaction cost) of Rs 6 per investment. Here's the important part: we are assuming that the investment performance is identical-both are running the same portfolio which gains ten per cent a year. The only difference is that the management expense is 2.25 per cent a year for the mutual fund and 0.0009 per cent a year for the NPS.
After thirty years, the mutual fund investor would have Rs 55 lakh and the NPS investor Rs 79 lakh. WOW!! isn't this an eye opener? I have not yet compared it with pension plans being offered by your insurance companies who charge much more than the mutual fund companies.
6. Can I withdraw the money in between?
No, you can normally not withdraw the money when you need ,only exception being some critical illness or when you need money for house purchase/building etc. You will have to wait till you are 60 years old to get this money. Also after you are 60 years old, you can withdraw a maximum of 60% of the retirement corpus in cash. Rest has to be used to buy annuities. Hence, it is not an investment but a genuine pension plan.
7.Any disadvantages?
Yes, the big disadvantage as on today is that the maturity proceeds will be subject to tax unlike other proceeds from EPFO . The govt might have to address this big drawback for it to a really good bet for investors.
All in all, my take on this is that this has been the best thing that has ever happened to an investor looking to plan for his retirement since there isn't any product today in the market which even come close to it in terms of the benefit of low charges that it offers to its investors.
So time to rethink our retirement investment strategy friends......

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