However, it does mean that the current nature of the withdrawal process is recognised as a problem at some level. The withdrawal rules might even be a deterrent to NPS membership for those who have a choice. Certainly, for the part of the working populace which does not have pension in its mental framework, not getting the entire retirement kitty at one go requires a mental shift.
NPS has been a work in progress and irritants have been removed at a somewhat leisurely pace. For example, till December 2018, the NPS had a split taxation structure, more complex than any other form of savings. The situation was that when NPS members retired, 40% of the accumulated value had to be compulsorily used to purchase an annuity and this amount was tax-free. The remaining amount could be withdrawn and was taxable. From December 2018 onwards, it became all tax-free, which is how it has always been in schemes like the EPF. However, the annuity part is still very much there —40% has to be compulsorily put into an annuity. Therefore, this relaxation of the annuity limit, whereby the corpus of smaller savers does not have to be put into an annuity is a recognition of the fact that the annuity is an irritant.
It is possible—likely—that the fact that many savers don’t like this is a judgement on the quality of annuities available in India. India is not an annuity-buying country. The NPS has annuity built into it because it started as —and still largely is—a substitute for the government’s own pension system for its employees. There has been some talk of the pension authority working with the insurance industry to develop annuities where the payout is linked to interest rates in the economy. I’m not sure what the shape of these products will be if and when they will be finally launched. The basic real-world need of the annuity-earner would be an inflation linked annuity payout. Whether that can ever be achieved or not is up in the air.
Still, all the irritants aside, the fact remains that more than a decade after it’s launch, NPS has more than proven itself on the basic criteria of returns and cost as you can see by visiting vro.in/nps, where Value Research publishes the most extensive analysis of all NPS plans that are available anywhere. Moreover, the ultra low cost model of the fund management is now clearly showing its salutary impact on the returns. The effect of the low cost compounds strongly as the years go by and therefore, over the long periods of time that the NPS saver will stay invested, the impact will be strong.
All in all, for savers who do not want to navigate the savings landscape themselves, NPS offers a pretty fine-tuned package that ticks all the boxes needed for retirement saving, both at the time of investing and after retirement, when the time comes for utilising the savings. NPS functions both as a mandatory pension system as well as a voluntary one that anyone can use. It’s unfortunate that for voluntary usage by individuals, NPS hasn’t gained all that much traction. Based on what I hear from savers, it’s clear that many of those who are advising on personal finance and selling such products are either not suggesting NPS or even actively downselling it. The reason is not hard to find—NPS cannot compete with other investments as far as commissions to middlemen go, even though the pension authority talks about this issue sometimes.
Savers have to make an effort to learn about NPS themselves, understand its utility and then start using it. It’s definitely worth that effort.
(The writer is CEO, Value Research)
