Is it wise to invest in National Pension System?

The most important constituent of financial planning is retirement planning. This becomes even more important in the current situation as the life expectancy of an average individual is increasing day by day. Hence, to enjoy your retirement period without many hiccups there are various avenues through which you can build the required corpus for your golden years.

One such avenue is National Pension System (NPS). It is a defined contribution pension system in which the contributions are invested in a mix of assets. The retirement corpus is dependent upon how the assets where you have invested have performed over the years. Your investment is managed by dedicated pension fund managers.

Under NPS, you can open two accounts, called Tier I and Tier II account. Tier I account is a non-withdrawable permanent retirement account whereas Tier II is a voluntary withdrawable account. Tier II account can be opened only when you have an active Tier I account. The minimum contribution in Tier I account is Rs 500.

You have two choices to contribute to the fund, auto and active choice. Under auto choice, your contribution will be invested according to your age and a predetermined formula. In case of active choice, you can decide upon your allocation to different asset classes. Currently, you can make allocation among three asset classes. Asset class E, which invests in equity, Asset G, which invests in fixed income securities issued by government and Asset Class C that invests in bonds issued by corporates. There is a cap on how much you can invest in equity. For the private sector, NPS subscriber can go up to 75 per cent equity investment with a rider that the equity allocations are tapered after the age of 50.

After you turn 60, you can exit from the NPS, however, 40 per cent of the corpus needs to be used for the purchase of an annuity. If an investor withdraws the corpus before reaching 60 years of age, he will have to invest 80 per cent of the accumulated corpus for buying an annuity.

Currently, investment up to 10 per cent of your basic pay is eligible for deduction under Sec 80CCD(1). Additional Rs. 50,000 is available under the new Sec 80CCD(1b) if you invest up to Rs. 50,000 on your own, over and above the Rs. 1.5 lakh saved under Sec 80C.

As of now, there are eight Fund Managers who can manage your NPS corpus.

Birla Sun Life Pension Scheme

HDFC Pension Fund

ICICI Prudential Pension Fund

Kotak Pension Fund

LIC Pension Fund

Reliance Capital Pension Fund

SBI Pension Fund

UTI Retirement Solutions

NPS can be used by efficiently to reduce their tax burden, especially if you fall in the higher tax bracket.