PFRDA – a horrendously complex acronym for a pension fund regulator has opened up the New Pension Scheme (NPS) to all citizens. Read the Offer Document, Welcome Kit, Subscriber Registration Form and Investment Guidelines.
Note: I’ve written about PFRDA earlier as part of my Make Rating Agencies Irrelevant theme, and I’m happy to note a certain part of my thoughts have been addressed: now, the section for investment in credit instruments asks for only 75% of the investment to be done in “investment grade” corporate bonds – the rest is left to the investment managers discretion. This is slightly better, and given investment grade rated stuff is on the same line as (unrated) liquid funds, fixed deposits and PSU/PFI/Muni/Infra bonds, it should help in making rating agencies irrelevant.
Let me go through the fundas of the New Pension Scheme (NPS) in some detail.
- First a small primer. Government employees must contribute to the NPS, and the government will match their contributions. It’s only since May 1 that all other citizens can register with the NPS.
- Any citizen can register. NRIs need a local bank account, and need to be KYC compliant. There are a lot of NRI regulations – present in detail in the offer documents. (I know that some of you are NRIs, and perhaps want some clarity on this, maybe I can do another post on the NRI applicability of this in another post.)
- Mandatory payments: 500 per contribution, 6000 per year. And you have to transact four times a year, minimum. If you don’t meet the minimums, you have to pay Rs. 100 per year of default, and make up all minimum amounts. Your account gets marked “dormant” till then.
- Two kinds of accounts – Non-withdrawable (Tier-I), and savings (Tier II). Right now, there’s only Tier I.
- Fees: There’s about Rs. 100 for registration (350 to one entity and 40 to another). Apart from that, there’s a Rs. 30 per transaction that you’ll pay. Annual fees are 350 a year. The fund mgmt charges are very low – add up to about 0.009% or so.
- Investment control: You can choose any of the six shortlisted fund managers to manage your money.
- Your money can be invested in Equity (E), Credit (C) or Government (G) instruments, and you can decide the ratio of these instruments in your portfolio.
Equity is linked to the Nifty/Sensex. Government is G-Secs, or Gilts. Credit involves liquid funds, fixed deposits, PSU bonds, Infrastructure or municipal bonds and corporate bonds.
You can’t put more than 50% into Equity. If you don’t want to choose the ratio, there’s an “auto choice” option that chooses between the three options depending on your age.
- Once you select you can’t change the fund manager or your investment ratio till May 2010. For Now.
- Withdrawals: If you withdraw before you’re 60, you have to invest 80% of your money in an annuity and take the remaining as a lumpsum. At 60, you have to put at least 40% into an annuity, and take the rest out (you can phase the rest till you’re 70). And if you die, the whole amount will be given to the nominee as a lumpsum.
- Taxation: All pension fund investment is tax-free, uptil 100K per year, under section 80c. Don’t rejoice, because this 100K includes all other 80C instruments (like Housing loan principal, Employee PF, Life Insurance, Children’s education fees etc.)
- Withdrawals are currently fully taxed. PFRDA is trying to get withdrawals tax free too, but it’s not quite worked yet.
- You will get an IPIN and a TPIN to get your account status online or on the telephone. The site online is: http://npscra.nsdl.co.in
So is this NPS a good deal? That’s a very good question. First, we don’t know yet how it will pan out – will an investment manager be better than another? Will you really be able to change things at will? Will the taxes screw you out of your own money?
Another post coming up…