The Hindu Business Line : New pension system to shield the aged

Citizens of India will now have an option of securing their post-retirement life with the New Pension Scheme established by the Government under the Pension Fund Regulatory and Development Authority (PFRDA).

The scheme has come in to effect from May 1, 2009. The unique feature of the scheme is the flexibility offered for investors to choose their asset allocation as well as their fund managers.

This scheme has already been made mandatory for Central Government employees from 2004 and is said to have earned a weighted average return of about 14.5 per cent (according to PFRDA) over the last one year.

How it works

Two types of accounts are available under the NPS.

Tier-I account: Individuals can contribute their savings for retirement into this non-withdrawal account.

Tier II account: Under this saving facility, individuals are free to withdraw their savings whenever they require.

Tier I account is available for contribution from May 1, 2009. The commencement of the Tier II account will be notified shortly by PFRDA.

Who can be member?

A citizen of India, whether resident or non resident aged between 18-55 years on the date of submission of the application can open this account.. Investors can open these accounts in 22 entities prescribed by PFRDA. These include LIC, State Bank of India, ICICI Bank and UTI Asset Management.

Who are not eligible?

Individual who are not granted an order of discharge by a court (un-discharged insolvent), individuals of unsound mind and pre-existing account holders under NPS.

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. Over and above the mandated limit of a minimum of four contributions, account holders can decide on the frequency and extent of the contribution across the year as per their convenience.

Withdrawal

On attaining normal retirement age (NRA) of 60 years account holders will be required to compulsorily withdraw at least 40 per cent of their pension wealth and the remaining 60 per cent can be withdrawn as a lump sum or in a phased manner.

A minimum of 10 per cent every year will be allowed under phased withdrawal.

If an account holder makes a withdrawal any time before 60 years of age he has to compulsorily annuitise 80 per cent of his accumulated pension wealth; such sum should be used to purchase annuity from any Insurance Regulatory and Development Authority regulated life insurance company.

The remaining 20 per cent can be withdrawn as a lump sum.

In the unfortunate event of death of the account holder at any time, the nominee will have an option receive 100 per cent of NPS pension wealth in lump sum.

If the nominee wishes to continue with New Pension System, he or she will have to subscribe to NPS individually.

Investment choice

The NPS offers you two options to invest your money. Active choice: Individual funds (Asset class E, asset class C and asset class G). Auto Choice: Lifecycle fund (see table).

Option one, called active choice, will allow investors to choose the proportion of money going in to equity (E), credit risk bearing income instruments (C) and government security (G).

Investors can also choose their fund managers out of a basket of six fund houses.

However, investment in equity would be restricted to index funds tracking the BSE Sensex and S&P CNX Nifty and subject to a maximum of 50 per cent of investor’s money.

In case the participant is unable to make a choice regarding asset allocation then contributions would be invested in “Auto Choice”. In auto choice the investment would be determined by a predefined portfolio.

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