“NPS is not just a retirement tool; it’s a long-term wealth creation vehicle,” said Sriram Iyer, CEO, HDFC Pension Fund Management, at Outlook Money’s ‘40After40’ Retirement Expo in Mumbai.
This statement set the tone for a deep dive into the National Pension System (NPS) and its role in securing a financially stable retirement. The panel, comprising industry leaders, explored the accessibility, cost-effectiveness, and strategic importance of NPS in a diversified retirement portfolio.
Key Features Making NPS Accessible
NPS is lauded for its inclusivity and flexibility, catering to a broad spectrum of individuals:
Open To All: Initially exclusive to government employees, NPS was expanded in 2009 to include corporate and all-citizen models. Individuals with valid know-your-customer (KYC) can open an NPS account.
Age Flexibility: NPS accommodates individuals aged 18-70, and with the newly introduced NPS Vatsalya scheme, even parents can open accounts for children, which eventually transitions into a regular NPS account when they reach adulthood,” said Suparna Tandon, CEO of NPS Trust.
Cost-Effective: NPS’s ultra-low costs, ranging from 0.005-0.009 per cent, makes it more affordable than mutual funds,” said Krishan Mishra, CEO of FPSB India.
Flexibility And Portability: Subscribers can shift investments across 11 pension fund managers, tailoring their portfolios according to risk appetite and return expectations.
Withdrawal Options: NPS offers both Tier-I and Tier-II accounts, with Tier-II providing flexible withdrawal options.
Transparency: Subscribers can easily track investments and returns from the NPS website, fostering informed decision-making.
How NPS Stacks Up Against Other Retirement Options
When compared to traditional retirement investment avenues, NPS stands out in several key areas.
Cost Efficiency: NPS’s management fees are significantly lower than those of mutual funds, leading to greater long-term savings.
Competitive Returns: Over 11 years, NPS has delivered consistent returns exceeding 11 per cent per annum, with an average of 14.3 per cent and a peak of 15.6 per cent, comparable to large-cap mutual funds, said Tandon.
Investment Stability: NPS’s performance in terms of risk management has been commendable, making it a reliable option for long-term planning.
Withdrawal Flexibility: While funds are locked in until age 60, partial withdrawals under specific conditions offer a degree of flexibility.
Annuity Requirement: Upon exit, 40 per cent of the corpus must be used to purchase an annuity, ensuring a steady income stream in retirement.
Role Of Financial Advisors In NPS Uptake
Financial advisors are pivotal in demystifying the NPS and integrating it into comprehensive financial plans.
Education And Awareness: Advisors play a crucial role in educating clients on benefits of NPS and retirement planning essentials, according to Mishra.
Personalised Financial Planning: Advisors assess individual financial situations, goals, and risk appetites, positioning NPS as a viable long-term savings option, according to Kiran Telang, certified financial planner and Securities and Exchange Board of India-registered investment advisor (Sebi-RIA).
Features And Benefits: Speakers underscore NPS’s low cost, tax benefits, and flexible investment choices, illustrating its role in a broader investment strategy.
Addressing Misconceptions: Many believe NPS locks funds indefinitely. Advisors clarify withdrawal options and liquidity through Tier-II accounts, according to Telang.
Encouraging Early Participation: Advisors advocate starting early to maximize compounding benefits.
Monitoring And Adjusting Investments: Ongoing support from advisors helps clients adjust their NPS portfolios in response to changing financial circumstances or market conditions, according to Mishra.
The panel concluded that while NPS is a robust tool for retirement planning, its efficacy depends on how well it’s integrated into an individual’s broader financial strategy. With its low costs, competitive returns, and structured approach, NPS offers a compelling case for inclusion in retirement portfolios, especially when guided by informed financial advisors.
