De-jargoned | New Pension System’s tier II account

De-jargoned | New Pension System’s tier II account

The Pension Fund Regulatory and Development Authority launched tier II account in December 2009 in order to lend flexibility to the basic structure of the New Pension System (NPS). Unlike its tier I account that locks your money till 60 years of age, tier II account works more like a savings account since you can withdraw money any time you like. For this reason, while the tier I account is called the pension account, tier II account is referred to as the savings account.

How does it work?

The structure of a tier II account is the same as that of tier I account, except for one basic difference. This account does not lock in your money and you need not buy an annuity or pension product with the final corpus—tier I account mandates that you buy an annuity with at least 40% of the corpus.

However, you need to ensure that you maintain a minimum balance of 2,000 at the end of each fiscal year.

Structure and cost

The basic structure of the account under NPS is like a mutual fund. You invest your money in the choice of your fund, a charge gets deducted periodically and you get the final corpus on maturity. You have the choice of three funds and two investment strategies. The three funds are equity, in which you can invest up to 50%; fixed income instruments other than government securities; and government securities. You can either invest in these funds on your own or opt for the “active choice" option, which invests your money according to your age. The equity component keeps reducing as you advance in age and approach retirement.

Other features

To have a tier II account, you need to have a tier I account. It is also mandatory that you have a savings bank account. You will get a Permanent Retirement Account Number (PRAN) when opening the tier I account. You can use this number to make contributions in tier II account also.

The minimum that you can contribute while opening your tier II account is 1,000. Subsequently, you can contribute a minimum of 250. There is a penalty of 100 for not maintaining the minimum balance.

You can open this account with an initial activation charge of 20. There is no annual maintenance charge for this account. However, other charges that are levied on tier I account apply in tier II account, too.

Since tier I does not have a lock in and, by that logic, isn’t a long- term investment vehicle, it does not qualify for tax deduction.

—Deepti Bhaskaran