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NPS Subscription: Is 50 Too Late To Invest In This Pension Scheme?

The National Pension System (NPS) is aimed to ensure a regular cash flow after retirement.

June 20, 2024
June 20, 2024
NPS Subscription

NPS Subscription

The National Pension System (NPS) is a government-backed small savings scheme that ensures regular cash flow in the form of monthly pensions after reaching the age of 60 or retirement.

NPS provides opportunities for both wealth creation and pensions, besides tax benefits for contributions of up to Rs 2 lakh in a financial year under the old tax regime.

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The Pension Fund Regulatory and Development Authority (PFRDA), which regulates NPS, has made several changes in the scheme to accommodate diverse requirements of investors. For example, it has increased the upper age limit for entry from 60 to 70, introduced a systematic lumpsum withdrawal facility, and option to select fund managers for different assets.

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However, is the NPS scheme beneficial in the short term?

Should You Invest In NPS After 50?

Those entering NPS at 50 can have equity exposure of up to a maximum of 20 per cent in the auto choice option and 75 per cent in the active choice route. Let’s assume one opts for auto choice at 50. The person will have 10 years to invest in NPS with a 20 per cent equity exposure.

Says Anuj Kesarwani, a certified financial planner, chartered trust and estate planner, and founder of Zenith Finserve, “Starting the NPS in your 50s can still be beneficial, but has limitations. While you can accumulate a retirement corpus and enjoy tax benefits, starting late means less time for your investments to grow.”

He explains this with an example: “Suppose you invest Rs 25,000 monthly from age 50 for 10 years at a 12 per cent growth rate, your corpus may reach around Rs 58 lakh. Doubling the investment to Rs 50,000 monthly can lead to around Rs 1.16 crore.” While the average return can differ depending on the auto or active option one selects, he points out that NPS equity returns have been around 15 per cent since inception and around 8.5 per cent on government and corporate bonds. So, at the assumed return of 12 per cent, your investment can last for 30 years if 4 per cent is withdrawn annually, which comes out to Rs 38,000 monthly; after 10 years, it may not be sufficient, considering 5-6 per cent inflation.

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Undoubtedly, the earlier one invests, the better the compounding interest benefit. However, if the person has started late in NPS, what should be the approach?

Here Are Three Factors To Consider.

  1. Risk Tolerance: Everyone has different risk tolerance levels. NPS considers the age factor in determining an individual’s risk tolerance levels for equity investments, which is considered a risky asset class. Thus, equity exposure is reduced every year until the age of 60.
  2. Flexibility: NPS provides a range of flexibility, including entry, exit and withdrawal, but a mandatory lock-in of 40 per cent of the corpus in an annuity plan may not be useful for some, especially those who already have other secured income sources of regular cash flow. So, choose NPS if you do not have a regular source of cash flow after retirement because NPS can motivate you to save for the long term.
  3. Retirement Age: While Indians typically retire at 60 in India, under the all-citizen model of NPS, one can continue to contribute until age 75. That way, one will have more than two decades of investment in NPS and sufficient time to compound the growth of the corpus. However, not everyone can afford to contribute the same amount to it after retirement.

ALSO READ: NPS Registration: How Can NRIs And OCIs Open The Account?

Kesarwani suggests, “Starting NPS in your 50s is a viable option for building a retirement corpus, but it should not be the sole strategy. While NPS provides a cost-effective way to save and comes with tax benefits, it has few limitations, such as mandatory annuitisation of 40 per cent of the corpus and restrictions on equity exposure for older investors.” He adds, “Hybrid mutual funds can be a better alternative for those starting late. They provide a regulated, transparent, and flexible investment avenue, which can be tailored to individual needs, making them suitable for those seeking more customisation in their retirement planning.”

So, if you plan to invest in NPS in your 50s, consider your risk tolerance, knowledge of the market, time horizon, and overall portfolio allocation, or seek a registered expert’s advice before deciding whether starting NPS for retirement would benefit you.

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