The National Pension System (NPS) is one of the popular small savings instruments for retirement. The scheme provides investors with a monthly pension after retirement and an avenue to grow their investments through market-linked returns, which can be a considerable amount because of the compounding interest rates the invested funds earn annually. The NPS Tier I and Tier II accounts, therefore, not only guarantee investors their pensions at retirement but also enable wealth-creating to reach their financial goals.

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However, those with a Tier I account can only open a Tier II account. The National Pension Trust, which oversees the NPS fund, adopted this rule to ensure investors do not neglect savings, as the scheme’s primary objective is to provide members with a monthly pension after retirement.

Both Tier I and Tier II accounts have different features and objectives to help subscribers select the options based on their needs and investment horizon. For example, one can exit a Tier II account at any time if a need for cash arises. Tier I accounts mature when the person reaches 60 or at retirement.

Advantage of Tier I Account

Tier I accounts help members earn monthly pensions post-retirement, depending on their corpus. Members can withdraw 60 per cent of the accumulated funds in a lumpsum or at intervals and the remaining portion must be invested in annuity for pension, a mandatory requirement. Investors can also choose the pension fund managers empanelled for the NPS scheme. Tier I accounts allow equity allocations up 75 per cent of the total holdings, which reduces with age.

Additionally, NPS Tier I accounts do not have a defined upper limit for investments. However, the minimum annual contribution is Rs 500, and the maximum is Rs 1,000.

Advantage of Tier II Account

Tier II account is a voluntary account and is allowed to open when the subscriber has an active Tier I account. The investor can withdraw the funds from the account anytime. Here, the minimum annual contribution is Rs 250.Additionally, a Tier II accountholder can switch to a Tier I any time. Another major feature is that it allows equity allocations up to 100 per cent, as Tier II accounts are primarily used for wealth creation.

Where Do NPS Funds Invest?

NPS invests in four asset classes: stocks, corporate debt instruments, government bonds, and alternative investment funds (AIFs), such as Commercial Mortgage-Backed Securities (CMBS), Mortgage-backed Securities (MBS), Real Estate Investment Trusts(REITs), and Infrastructure Investment Trusts(InvITs).

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Corporate debt and government bond assets provide fixed income, whereas equities allow wealth creation from compounding interests. However, there is a set rule for allocation. Tier-I accounts allow a maximum equity allocation of 75 per cent of the total holdings, which decreases with age. On the other hand, Tier II accounts allow up to 100 per cent equity allocation. Additionally, contributions to alternative investment funds is restricted to 5 per cent of the total assets.

Options For Investors

Investors have the option to select between active and auto modes of investment. In active mode, the maximum equity allocation is 75 per cent, whereas in the auto mode, the equity allocation could range from 25 to 75 per cent, depending on the options investors select. For instance, the maximum equity allocation in an aggressive life cycle fund is 75 per cent; in a moderate life cycle fund, it is 50 per cent; and in a conservative life cycle fund, it is 25 per cent.

In conclusion, NPS offers investors various investment options for pension and wealth creation. Lately, the number of NPS subscribers has risen significantly because of its attractive returns, ease of investing, and guaranteed monthly pensions at retirement. Those looking to multiply their wealth also have opportunities via the NPS Tier II account, where up to 100 per cent of their money can be invested in equities.