Se­nior cit­i­zens can earn good re­turns from NPS

The rais­ing of the en­try age in NPS has opened up an at­trac­tive new in­vest­ment av­enue for them since they have been hit hard by the fall in in­ter­est rates on small sav­ings schemes

Business Standard - - YOUR MONEY - ARNAV PANDYA The au­thor is a cer­ti­fied fi­nan­cial plan­ner

Re­cently the en­try age in the Na­tional Pen­sion Sys­tem (NPS) was raised from 60 to 65. And, this is a rea­son to smile for many se­nior cit­i­zens who did not en­ter this prod­uct at an ear­lier age. With the fall in in­ter­est rates of small sav­ings schemes and even the ba­sic sav­ings de­posits, se­nior cit­i­zens have been hit the most, as they de­pend on fixed-in­come in­stru­ments for reg­u­lar in­come with ad­e­quate safety.

Cater­ing to in­creas­ing life span: Nor­mally, one does not bother about the up­per limit of en­try in an in­stru­ment. The ex­pec­ta­tion is that most people who en­ter NPS would be either young or in their mid­dle age, and they would use NPS for their re­tire­ment sav­ing.

But, with in­creas­ing life spans, people can no longer fol­low the tra­di­tional for­mat of ac­cu­mu­lat­ing till 60 and then liv­ing off the ac­cu­mu­lated cor­pus after that age. Many people will post­pone their ef­fec­tive re­tire­ment age to 65 or be­yond. If they work after 60, they will be in a po­si­tion to save and in­vest as well. Also, many people get a con­sid­er­able cor­pus when they re­tire. They need av­enues where they can in­vest that money. For such people, the rais­ing of the en­try age in NPS to 65 has come as a boon.

Rais­ing the in­vest­ment age: Nor­mally, the ac­cu­mu­la­tion phase in NPS ends at 60. But, there is an op­tion avail­able un­der which it can be ex­tended be­yond that. If an in­vestor ex­er­cises this op­tion, he doesn’t have to with­draw his cor­pus at 60. He can con­tinue to in­vest till 70. This is the op­tion that all se­nior cit­i­zens will need to ex­er­cise to make ef­fec­tive use of NPS.

More choice: The rais­ing of en­try age has opened up one more in­vest­ment op­tion for se­nior cit­i­zens. Those who have crossed 60 years of age gen­er­ally rely on fixed-in­come in­stru­ments like fixed de­posits. How­ever, the tra­di­tional means of gen­er­at­ing in­come through fixed­in­come in­stru­ments are now com­ing un­der in­creas­ing strain, as the in­ter­est rates in the econ­omy con­tinue their down­ward jour­ney. This has led to the op­tions avail­able to se­nior cit­i­zens get­ting squeezed. They can now look at the NPS as an op­tion that can help them in their re­tire­ment plan­ning.

At­trac­tive re­turns: Past re­turns from NPS have been at­trac­tive. Its eq­uity funds (tier-I) have given a re­turn of 14.37-18.69 per cent over the past year ( Source: Value Re­search). For an in­vest­ment hori­zon of 10 years (60-70), se­nior cit­i­zens with the re­quired risk ap­petite may take some ex­po­sure to eq­uity schemes (the max­i­mum per­mit­ted is 50 per cent in the ac­tive choice op­tion). For con­ser­va­tive in­vestors who would like the safety of debt, the re­turns have been quite at­trac­tive. The tier-I cor­po­rate bond funds (C) of NPS have given a re­turn of 9.05-9.62 per cent over the past year, while gov­ern­ment bond funds have given a re­turn of 7.3210.08 per cent. Longer-term re­turns, even on the debt side, have also been at­trac­tive. This makes NPS an at­trac­tive in­vest­ment even for con­ser­va­tive in­vestors.

Choose wisely: Within NPS, a wide range of in­vest­ment op­tions is avail­able. Se­nior cit­i­zens who en­ter this scheme will have to choose wisely. First, they will have to de­cide on their eq­uity:debt al­lo­ca­tion. The eq­uity:debt mix should be cho­sen keep­ing in mind the se­nior cit­i­zen’s risk ap­petite.

Sec­ond, mul­ti­ple fund man­agers are avail­able. In­vestors should look at past per­for­mance of funds and make the right choice. With ac­tive fund man­age­ment be­ing al­lowed now, the di­ver­gence in re­turns be­tween pen­sion fund man­agers may widen in the fu­ture. One point to be re­mem­bered here is that at present one has to choose the eq­uity, cor­po­rate bond and gov­ern­ment bond fund from the same fund man­ager. One can’t choose the eq­uity fund of one pen­sion man­ager, cor­po­rate bond fund of a sec­ond, and gov­ern­ment bond fund of a third.

Three, the tier-I ac­count can serve as the se­nior cit­i­zen’s re­tire­ment ac­count. The tier-II ac­count al­lows with­drawal at any time and can, hence, be used by se­nior cit­i­zens to park funds that may be needed in the near fu­ture. Since the in­vest­ment hori­zon in the tier-II ac­count is likely to be shorter, se­nior cit­i­zens should stick to debt funds here.

Im­pli­ca­tion of an­nu­ity op­tion: At the time of tak­ing the money out, at least 40 per cent has to be con­verted into an an­nu­ity. This con­di­tion is ac­tu­ally a dou­ble-edged sword be­cause the con­di­tions cur­rently say that the an­nu­ity has to be pur­chased from a life in­sur­ance com­pany. Un­for­tu­nately, the re­turns of an­nu­ities are not very at­trac­tive. So, this fea­ture is ac­tu­ally a neg­a­tive fac­tor that the in­vestor must face. The only sav­ing grace of an an­nu­ity is that it pro­tects the in­vestor against longevity risk (the an­nu­ity will con­tinue to make a pay­out so long as he lives). Mean­while, there is talk of re­mov­ing the com­pul­sory an­nuiti­sa­tion re­quire­ment. If the gov­ern­ment al­lows this, in­vestors may be able to with­draw money from NPS in the form of a sys­tem­atic with­drawal plan.

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