Friday, May 1, 2009

NEW PENSION SCHEME - THINGS TO KNOW

The launch of New Pension Scheme (NPS) in India, has given an option to save for one's pension to millions of Indians. Here are few of the basic things that you must know about NPS.
Lowest Cost structure - The cost of managing this fund is just 0.0009% of the funds which is much lesser than the second best investment option mutual funds. Mutual funds charge at least 2.25% of the funds annually.
Option of "Auto Choice" -Under this option, for those aged 18-36 , 50% of the amount in their pension account will be invested in equity, 30% in corporate bonds and the remaining 20% in government securities. From age 36 onwards, the proportion of investments in equity and corporate bonds will decrease annually while that in government securities will increase till the mix reaches 10% in equity, 10% in corporate bonds and 80% in government securities at age 55. People not wanting to go for "Auto chance" can decide on their own mix between equity, bonds and govt security.
Tax benefit under Sec 80C- The contribution in this fund till Rs 100000 will be tax free under sec 80C of the IT ACT. However, the withdrawal on maturity is taxable as of now.
Minimum Contribution- Rs 6000 per annum.
How to open NPS account? To open a pension account, you will have to approach the branches of any of the 22 ‘point of presence’ (POP) service providers selected by the authority. These include State Bank of India and all its seven subsidiaries as well as ICICI Bank and Punjab National Bank.
Fund Managers - There are 6 fund managers appointed by government who will manage this fund. The investor has an option to change his fund manager based on the fund manager's performance.He can do so by intimating the "Point of purchase".
How does it compare with Mutual Funds? NPS does not provide the option of withdrawal from the scheme before maturity unlike mutual funds where the exit option is always available to the investor. The NPS however scores over mutual funds because of its low cost structure of about 0.0009% as compared to 2.25% in case of MFs.
How will the money be paid on maturity?If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
What kind of return can we expect from NPS? Since the fund will have equity exposure, its returns are not guaranteed unlike debt instruments like PPF,but, the similar funds across the world have delivered far superior returns than debt funds. NPS too is India has delivered 14% return in last 1 year which is great considering the mayhem at stock markets.

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