National Pension Scheme: What is missing?

NPS – New pension scheme or National pension scheme….does attract a lot of attention from many investors. However the jury is still out on whether one should invest in it nor not invest.

One major (I mean MAJOR) DRAWBACK is you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage.

Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be invested BACK in an annuity. Let us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…looks good? Well depends on what you are capable of doing with your own money!

My suggestion is very simple. If a person has accumulated money in N P S, he should be allowed to withdraw HALF and the other half HE/SHE should be allowed to transfer to

– Senior Citizen Yojana or PPF. This will ensure that my corpus runs only the risk of inflation – from the age of say 70.

If certainty is brought to the end use of the NPS, I guess more people will be willing to save / invest in the NPS.

WANT YOUR FEEDBACK please…wish to forward the views of the people to the current powers that be in the NPS. Government will be more than happy to make this work….any other ideas?

Based on the feedback that I have got for this post (I did the original post on April 25) I need to clarify (this is dated 7th May, 2010) that what happens to the bulk of your money is more or less the same in any pension plan. So whether it is a Lic pension plan, a sbi pension plan, a Kotak pension plan, a Hdfc pension plan, a Max New York Life pension plan, a sbi life pension plan, a icici prudential pension plan, it does not matter.

Also the end use of the pension amount is the same immaterial of whether it is a traditional / classic pension plan or a unit linked pension plan. So whether it is a sbi ulip, Kotak ulip, Birla ulip, a Hdfc ulip or a lic ulip, reliance ulip, icici prudential ulip – if it is BOUGHT AS A PENSION plan, the end result is the same.

The Pension accumulator and ‘payer’ gets to keep A BIG CHUNK OF THE CORPUS and pay you a pension – and it may be very different from what a pension calculator said you need to live! So please be careful about ANY PENSION plan – not just the NPS!

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16 Responses to “National Pension Scheme: What is missing?”

  1. Any pension scheme
    – I dont have belief in *any pension scheme* exactly for the same reason. After accumulating huge money, user dont get to take it. Instead it goes to some annuity provider who gives a predetermined interest rate at a pittance 5% or so.
    (God knows what happens after person dies, hopefully corpus goes to nominee)

    – Since this annuity money is constant, its purchasing power reduces because of inflation. (Person may live again for another 10-20-30 years and purchasing power would have reduced by 1/2,1/4,1/8 minimum at 6% inflation. With higher inflation, it will be even far worse because of compounding).

    – So the money has to ideally go into some balanced fund which gives above inflation returns.

    – High Lockin . If fund doesnt perform, one cant do anything, keep investing with loser.

    – So i dont put in any pension fund. Instead i put in MF and will shift some money to balanced fund during retirement. Other half will still be in equity. (as you said this option depends on how good/disciplined is a person to manage his own money)

    Other reasons especially -ve to NPS

    – Govt is all too powerful to leave money with them. If they say later or change rules, now we can only give 10% of corpus, rest 90% you have to buy pittance annuity, one has no choice.
    (A few years back didnt a state in india do something similar like that with pension benefits of state employees and those employees had *no choice*)

    – Everytime there is a divestment, and govt asks the NPS to make stupid investment, they have no choice but to obey. Whatever other kinds of investments like bonds etc, if govt asks they have to buy.
    (yes NPS is managed by private funds, they may oblige, not to incur wrath of govt and loss of future business)

    – Not much incentive to perform. There is high lockin. People cant take money outside until another 30 years, so no fear of anything. No one will get fired for under-performance.

    – Uncertainty, over government changes. Whatever rulers come and whatever “games” they play with the money, investor cant do anything.

    – Struggle to get money released. With such huge accumulated money, it may be a struggle to get a part of corpus released in the end. [It is difficult to get *any* money released from the govt]

  2. Dear Subra, In case of NPS, My take is simple, Invest the minimum possible amount i.e. 6K yly in Tier 1 account & max. in Tier 2 account. As the Tier 2 account is designed to withdraw as per choice of the investor & not as per choice of the Govt. We can then use the corpus of Tier 2 as per our own comfort level with various Annuity Option available – SCSS, PPF, POMIS, MF MIPs, Ins. Cos. Immediate Annuity plans…..

    But currently the Tax arbitrage available to PF & PPF is the biggest disadvantage for NPS, I do hope, E-E-T comes ASAP for all investment products to create a level playing field.

    Thanks

    Ashal

  3. at 6k yearly it becomes an expensive fund because of the absolute charges. Of course for 3 years you will get a 1000 per annum subsidy. Treat this as an advance reimbursement of all charges for the next 4 years…then it does not matter.

    Still the bother of going to not very helpful psu bank to deal….is a big put off…still do not know of people who have opened nps account

  4. also Ashal you should worry about income tax only at the withdrawal. I heard from reliable sources that Dr. M M Singh is against PPf going into EET mode. Makes no sense. If they are saying “All withdrawals are to be taxed as capital gains” it is unfair because more than 50% will be PRINCIPAL.

    if they say 2% tax will be levied on all withdrawals..it would be ok. Also in a subsidized scheme like PPF/ senior citizen the interest rate can be reduced an STILL keep it tax free. Make ppf 7% interest that is like putting a 10% tax..ON ALL – much simpler than introducing tds, claiming refund…

  5. @rrp
    You are very correct.. If the NPS is successful and collects a lot of money, it will be too tempting for the politicians to use the money.. Its like a diabetic saying ” Ill just take a small bite of the cake” and then ending up eating up the whole cake..

    All our politicians want to look charitable and large hearted.. But with other people’s money..

    ( I keep hearing from the US media that this is exactly what is happening with the social security funds in the US.. Some commentators even call it a Ponzi scheme..For eg..

    “Bernie Madoff took money from people who thought he’d invested it, gave some to others who thought it was a partial return on their earlier investments and kept much for himself. That’s called a Ponzi scheme, and his $50 billion fraud was called the biggest ever. But it wasn’t the biggest. Social Security and Medicare are much bigger ones. These are trillion-dollar scams. Medicare has a $36 trillion unfunded liability. Social Security’s is $8 trillion. There’s no money to keep those promises. But Congress isn’t investigating this scam. Congress runs it. That FICA money you thought government had saved for your retirement is gone. There’s nothing left but IOUs backed by nothing. Your money was spent not only on current retirees but on wars, welfare, corporate bailouts, earmarks and all the other stuff Congress wants. For years, this was possible because the FICA tax brought in surpluses that allowed government to pay retirees more than they contributed and still help buy those other things. Those days are gone. … Our forefathers would be appalled. After the American Revolution, when the new government was debating how to pay its bills, George Washington said this about a national debt: ‘We should avoid ungenerously throwing upon posterity … the burden we ourselves ought to bear.’ Well, we sure are dumping my generation’s debt onto posterity. I wish we had more politicians like George Washington.” –columnist John Stossel)

  6. Dear Subra, as I said I’m not against investing in NPS Tier 1 acct. the only problem that I have, is to go for a mandatory option of predetermined %age of corpus for annuity. So to keep my option open at the time of retirement, I’ll invest minimum in Tier 1 & max. in Tier 2.

    Regarding ur suggestion of 2% levy on withdrawals & keeping the PFs & PPFs EEE with a lower interest rate. I’m with U, but I don’t think the Govt. can go for interest reduction on these schemes keeping the social & POLITICAL pressures in mind.

    Thanks

    Ashal

  7. Week’s Top Stories on Personal Finance (Week Ending April 25, 2010) - Ranjan Varma's Blog on April 27th, 2010 at 12:09 pm

    […] on the National Pension Scheme and why it is not taking […]

  8. Hi i am a MCD employee and 10% of my basic grade pay and dearness allowance goes to NPS the govt also provides and that is added to our income. But i dont know what MCD is doing with my money. I am 30 years of age and i have no say in all these things. This NPS is just making a fool of all the govt employees

  9. “et us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…”

    This means an interest of about 0.5% on 250 lakhs.

    This seems to be a bizarre underestimate to prove your point.

  10. V.LAKSHMINARASIMHAN on July 22nd, 2010 at 9:13 pm

    I wish to state the following:
    I happened to assist one of my younger colleague to fill up the mandatory form to the Salary Disbursing Officer.
    There is a blank power of attorney to which one has to sign (Obviously no other choice is available) that authenticates any repeat ANY agency to do anything repeat ANYTHING with the money AND THAT AGENCY NEED NOT GET ANY CONCURRENCE ON CASE BY CASE BASIS. FORCING ONE TO PART WITH MONEY AT GUN/KNIFE POINT APPEARS TO BE MORE NAIVE OFFENCE AND DEFINITELY LEAST HARMFUL TO THE VICTIM.

  11. Pattu Lashminarasimhan’s observation is scary is it not? also trying to guess interest rates over 40 years is almost foolish

  12. Sirs
    I want the NPS to allow its subscribers to decide his/her own retirement age. bcose, if I am aged 51, and is unable to earn and is suffering from any deceases, will live only till tyhe age of 55, I wanted my remain life happy with pension. So here, if Govt doesnot allow a subsriber to withdraw or get pension, what is the use of his hard earned money?

  13. 01 GOVT SHOULD TAKE RESPONSIBILITY OF PAYING PENSION (NOT THE INSURER).

    02 THE PENSION AMOUNT SHOULD BE DECLARED.

    THESE SO CALLED REGULATORS ONLY ARE VISIBLE WHEN THEY GET MONEY. WHEN IT COMES TO PAY , ALL ARE RUNNING AWAY FROM RESPONSIBILITY.

    WHEN YOU CAN DECIDE WHAT YOU WANT, WHY CAN’T YOU DECIDE WHAT YOU PAY.

    PFRDA IS JUST THROUGHING THE BALL TO REGULATORS AND WANTS TO MAKE USELESS RULES.

    SUCH AGENCIES OR BROKERS SHOULD BE STOPPED. THEY ARE JUST ADDITIONAL COST TO PEOPLE IF THEY JUST DO NOT TAKE RESPONISIBLITY OF PAYING.

    AS A CUSTOMER WE WANT SINGLE POINT OF CONTACT ie PFRDA OTHERWISE REQUEST THEM TO LEAVE FROM MAKING JUST USELESS RULES.

  14. Exactly the reason why I don’t like NPS. You are forced to buy annuity at the time you retire, even if the market condition is not favorable. You are locked for life.

  15. “You can only retire at 60” – NPS
    Even the PPF has only a lock in of 15 years! For a young graduate joining job at age 22, the NPS is like a promise of heaven that may happen after 38 years!

    Common – young aged people and 38 years of working?
    Oh my good – the law/plan makers don’t understand young employees! Like NPS with a lower lock in of say 15 years and option to increment it in slots of 5 years.

  16. The latest by NPS – An invisible entry load of 0.25% for every contribution!

    For transferring one lakh rupee to NPS(tier 1 or tier2), i need to pay Rs. 250/-. This is also true for online transfer(SBI has the facility).

    All this when a simple NEFT is available at Rs.5/-!

    I opened an NPS account last November expecting employer to contribute 10% of salary for tax saving. When I calculated the total charges till March 2013, the total expense was 3.5% for a simple 10000 rupee. This does not include the annual charges.

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