Here is how NPS costs will now be charged
NPS levies various chargessuch as for on-boarding and even for cancelling the units. Some of these are set to be revised. Understand them before investing
Recently the pension sector regulator revised distribution charges for the National Pension System. The new charge structure gives slightly more to the Points of Presence (PoPs)—which include NPS distributors like banks—to sell NPS and also incentivises them to get customers to invest in NPS every year. In fact, even the pension fund management charge that you pay the fund managers is likely to go up once the pension fund managers (PFMs) get fresh licenses. While these two charges are commonly known, there are charges under three other cost heads that you pay in NPS. These are costs that you pay to the central record keeping agency (CRA), custodian and the NPS trust.
It is not only the costs that you need to understand but also the manner in which they are levied is important to know. Read on to familiarise yourself with the charges in NPS and also to understand its impact on your investment.
Upfront costs
In NPS, upfront costs that are deducted straight from the money you give are associated with on-boarding. There are two ways of opening an NPS account: through a PoP and online on your own. When you go to the PoP, you pay Rs200 as a one-time registration charge. This money is collected upfront and can get deducted from your contribution amount. Other than that, you also pay an additional 0.25% of the contribution, subject to a minimum of Rs20 and maximum of Rs25,000 upfront. This charge of 0.25% is a recurring charge you pay the distributor every time you make an investment. For a non-financial transaction like placing a request to change the fund manager, the PoP can charge Rs20, which is again to be paid when you make the request upfront.
But if you open your account online using your Permanent Account Number (PAN), you will need to provide details of a bank account, that’s empanelled with Pension Fund Regulatory and Development Authority so the authorities may tap it for the Know Your Customer (KYC) process. You can see the list of banks under online service section here. You pay this bank a one-time charge of Rs200 that gets collected.
Subsequently on every contribution you pay, 0.1% of the amount goes to this bank as a commission. Even when you open your account using a PoP and then move online subsequently, you pay a charge of 0.1% to the associated PoP on every contribution you make. But when you use your Aadhaar to open your account yourself online, there are no distribution charges to be paid. “The charges that are levied upfront are negotiable up to the maximum limit specified under the rules. That means customers can negotiate the costs and PoPs have the flexibility to alter the costs. However, in retail usually these costs don’t end up being negotiated,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.
Costs that comprise NAV
After paying the upfront costs to the distributor, the money gets invested and three types of charges gets deducted from this corpus. These costs get reflected in the net asset value (NAV) of your fund. The first is the pension fund management charge that you pay to your pension fund manager for managing your money.
Currently this charge is 0.01% per annum of the invested amount. PFMs are not allowed to levy any other charge, but if a PFM invests your money through a mutual fund then the underlying charge of that mutual fund will apply as well and this could go up to 2.5%. The second charge is what you pay to the Stockholding Corporation which is the custodian and is entrusted with the responsibility of safekeeping securities held under the NPS. You pay a custodian charge of 0.0032% per annum of the invested amount. While these two costs were mentioned in the original architecture of the NPS, last year PFRDA levied an additional charge under the cost head reimbursement of expenses payable to the NPS Trust. NPS Trust monitors various stakeholders in the NPS such as the pension fund managers and PoPs in the interest of the subscribers. In order to recover the expenses of the trust, PFRDA levied an additional charge of 0.01% per annum of the invested amount. Remember these costs are recovered daily and is reflected in the Net Asset Value that you see. It’s at these NAV that your money gets invested in the form of units you hold.
Charged by cancelling units
Then there are costs that are recovered by cancelling the units that you hold and these costs are primarily deducted towards the CRA charges. The CRA is the backbone of NPS architecture. It’s not only a repository of data, but it also responsible for administration and customer service functions and acts as operational interface between the different entities of NPS, such as the pension fund managers, trustee banks and the distributors. Currently there are two CRAs namely NCRA (NSDL-CRA) and KCRA (Karvy-CRA) and you have the option to choose between the two. To begin with a one-time account opening fee, NCRA levies a fixed cost of Rs40 and KCRA levies Rs39.36 in the first year. Every year the CRAs also levy an account maintenance charge which is again a fixed cost (NCRA levies Rs95 and KCRA levies Rs57.63) and for each transaction financial or non-financial, it levies a charge of Rs3.75 for NCRA and Rs3.36 for KCRA. These charges are recovered on a quarterly basis by cancelling the units.
Other than the CRA costs, the PoP would also get Rs50 every year as persistency charge. This will be recovered by cancelling units. Effective from 1 November, PoPs are entitled to a persistency charge of Rs50 a year if the subscriber contributes at least Rs1,000, the minimum amount required every year, in the NPS in that financial year. “But it’s not as if a PoP opens a retail subscriber account in say January of that financial year and at end of the year recovers Rs50. The account will need to be at least 6 months old for the PoP to recover charges,” added Shukla.
Impact of costs
Keep in mind that each of these costs heads will invite a GST at 18%; however, costs on account of NPS Trust is exempt. So how do these costs impact your investment return? According to Kulin Patel, head retirement, South Asia for Willis Towers Watson, the impact is not much. “From a long term standpoint, the overall charges are still low when you compare to other financial products. The subscriber should not see a significant difference in the long term,” he said. However, financial planners recommend a comprehensive approach that looks at factors such as exits and fund performance to take a call.
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First Published:7 Nov 2017, 02:06 AM IST
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