By Kurian Jose

Until recently, retirement planning was largely overlooked. Even today, it ranks low on the financial priority list, often coming after buying a home or paying for children’s education and weddings. This delayed approach, however, is no longer financially viable. With rising living costs and inflation, starting early on retirement savings has become a necessity.

The National Pension System (NPS) stands out as a crucial investment opportunity in ensuring both retirement readiness and tax efficiency. NPS aims to encourage savings and provide a stable income during retirement. While traditionally overshadowed by other investment options like the Public Provident Fund (PPF), mutual funds, or fixed deposits, NPS offers unique advantages that make it an essential component of a sound financial plan. Here’s why:

Also Read: FIRE Strategy: Is Retirement Possible Before 50? Things To Consider

1. Tax Benefits and Efficient Planning

NPS offers significant tax savings for those in the old tax regime as well as for those in the new tax regime, making it one of the most tax-efficient investment options.

2. Long-Term Wealth Accumulation

One of the major appeals of NPS is the potential for long-term wealth creation. The scheme invests your money in a mix of equity, corporate bonds, government securities and alternate investments, with an opportunity to choose the allocation based on your risk appetite. Since equities tend to generate higher returns over long periods, younger subscribers can benefit from NPS by choosing a higher equity allocation, which may provide superior returns over the long term as compared to traditional fixed-income investments.

The compounding nature of NPS, especially when contributions are made regularly over several decades, ensures the accumulation of significant wealth by the time one retires. This makes NPS an essential retirement-focused investment tool, offering inflation-beating returns.

3. Low-Cost Investment Option

Another compelling reason NPS should be part of your financial plan is its low-cost structure. Compared to other financial instruments available for retirement planning, NPS's fund management costs are among the lowest in the market. With management fees capped at 0.09% per annum, this allows your investment to grow more efficiently. Over time, this low-cost structure leads to higher net returns and greater retirement corpus.

4. Flexibility and Control Over Investments

NPS offers flexibility in managing investments, allowing subscribers to choose either an auto or active investment choice. In the auto option, the system automatically adjusts the allocation of assets based on the subscriber's age, while the active option allows subscribers to determine their own equity, corporate bond, government security and alternate investment allocation. This flexibility makes NPS a suitable choice for subscribers across different risk-taking abilities. Aggressive subscribers can increase their exposure to equities, while the conservative ones can choose a more balanced asset allocation.

5. Retirement Security and Regular Pension

The ultimate goal of NPS is to ensure that subscribers have a steady income stream post-retirement. Once you reach the age of 60, you can withdraw a maximum of 60 per cent of your corpus, while a minimum of 40 per cent has to be annuitized, meaning that it is converted into a pension to provide a guaranteed monthly income. This offers retirees financial security and helps them meet their regular expenses without dipping into their accumulated wealth.

Moreover, 60 per cent of the corpus can be withdrawn tax-free at maturity, further enhancing its appeal as a tax-efficient retirement tool.

6. Portability and Accessibility

NPS accounts are highly portable, allowing subscribers to continue investing regardless of changes in location or employment. Whether you switch jobs, relocate to a different city, or work in a different sector, your NPS account remains unaffected. Additionally, NPS accounts can be easily accessed and managed online, offering convenience and control to subscribers. The ease of tracking and modifying investments online ensures that your retirement planning remains on track, irrespective of life changes.

7. Regulated and Transparent Framework

The Pension Fund Regulatory and Development Authority (PFRDA) governs NPS, ensuring transparency and accountability. The PFRDA monitors fund managers and ensures that investments are made in accordance with investment guidelines.

So, to summarise, Incorporating NPS into your financial plan makes sense for both retirement and tax-saving purposes. With its tax efficiency, long-term wealth creation potential, low cost, and secure retirement income, NPS offers a comprehensive solution for those looking to secure their financial future. By integrating NPS into your broader financial strategy, you can ensure that your golden years are financially stable and free from worry.

Kurian Jose, the author of this article, is the CEO of Tata Pension Management.