The Most Authentic Guide on Personal Finance and Investments


(Funny) Words of Wisdom : "Someone stole all my credit cards, but I won't be reporting it. The thief spends less than my wife did." ~ Henny Youngman

Pension bill passed. But NPS doesn't get my vote.

On Sept 4th, the Lok Sabha finally passed the Pension Fund Regulatory and Development Authority Bill (PFRDA) that was pending since 2011.

As of now, however, nothing has changed for you and me. The passing of the bill merely confers a statutory status to PFRDA, which regulates the National Pension Scheme (NPS). Till now PFRDA was a non-statutory body.

National Pension Scheme was introduced in 2004 and made mandatory for central government employees. Since then almost all states have also covered their employees under the NPS.

From May 2009, NPS has been opened to all individuals.

However, in its present form, NPS suffers from many drawbacks when compared to the alternatives available in the market.

a) There is no option to withdraw from the scheme. If you quit, you will get back only 20% of the corpus. Balance 80% would be compulsorily utilized to buy an annuity plan for you that will give you lifetime pension. No one can foresee what will happen over the next 30-40 years. Suppose I have settled abroad. Then this pension is of no use to me. 

Hence, I would rather choose an investment that gives me an option to quit, if need be, and manage my money in the manner that suits me the best. 

b) Even if I stick with the scheme till retirement, I get back only 60% of the corpus (balance 40% would be compulsorily utilized to buy an annuity plan). Moreover, this 60% withdrawal is taxable. Instead, if I increase my EPF contribution, my withdrawals at retirement would be both 100% and tax-free. Or, if I am not covered under EPF, a combination of PPF+ MFs (debt and/or equity) would give me back 100% money and with nil/much lower tax liability  

Hence, I would rather choose an investment that gives me my full money back and with nil/lesser tax liability.

c) Even if I am entitled to receive lifetime pension from the annuity plan, it is taxable. Instead, I could invest in many other products and earn my income with nil/lower tax liability. For example, I could put some money in PPF. I could buy tax-free bonds. I could invest in debt MFs.

Hence, I would rather choose an investment that gives me freedom to invest in products that are more beneficial to me.

Let us hope that PFRDA looks into these issues and comes up with some satisfactory solutions. Till then I would bank on 'My Plan' than the 'Pension Plan'.

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