Central Govt employees can do better retirement planning, say experts, as new NPS rules to come into force

The government has approved the extension of the LC75 investment option to central government employees under both the pension plans – National Pension System (NPS) and Unified Pension Scheme (UPS).

This means if the subscriber opts for the LC75 investment option, there will be an equity allocation of up to 75 percent of total contribution, reducing gradually from age 36 to 55. Every year, equity allocation will reduce by 4% under NPS.

At age 36, equity allocation would fall to 71% and next year, it would reduce further to 67% and so on.

The new rules also entail giving a green signal to the BLC investment option to the Central government employees. Those who are not aware, BLC refers to Balanced Life Cycle, which is a modified version of LC50 with equity allocation tapering from age 45 (instead of 35), thus enabling employees to remain invested in equities for a longer period, if desired.

Experts laud the move

Wealth advisors say it is a good move since it offers flexibility to earn a higher return for government employees, just as their counterparts in the private sector do.

“NPS started in 2004 (whereas it was opened for private sector employees in 2009), and in the past 21 years, the maximum limit of 50 percent means government employees could not enjoy the maximum benefits of higher equity allocation. Even in the privately managed asset allocation planning, we recommend investors who have 10 plus years left before retirement to keep equity allocation up to 75%. Then, after the age of 50, one can keep a higher allocation to debt and lower to equity based on your risk appetite,” says Sridharan S., a Sebi-registered investment advisor and founder of Wealth Ladder Direct.

Akhil Rathi, Head, Financial Advisory, 1 Finance, says, “This is indeed a positive move for government employees’ retirement planning. Allowing equity exposure up to 75% gives younger investors the opportunity to benefit from higher growth potential during their early years, when they can handle market fluctuations better. Retirement planning requires a long-term horizon, and equity plays a crucial role in wealth creation over decades.”

Impetus for young employees

Experts assert that this move is particularly beneficial for younger cohort who can make the most of compounding by investing a higher proportion in equity in their early years of investing.

"This move is particularly beneficial for young employees, who can take advantage of the long-term compounding returns that the equity asset class can offer. Equity is the one asset class that has the potential to generate inflation-hedged returns in the long run, which can help young employees to accumulate a sustainable, sizable corpus over decades of their service for their retirement goal," says Preeti Zende, Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

“This move equips younger government employees with more flexibility and control over their long-term retirement portfolios. They can now harness higher equity exposure, which historically offers more attractive long-term returns compared to traditional debt-only allocations,” says Aakanksha Shukla, AVP, Wealth Management, Master Capital Services.

However, investors should refrain from raising their equity allocation without weighing the pros and cons.

Akhil Rathi recommends investors first carry out an assessment of cash flows before jumping the gun.

“Investors should not rush to increase their equity allocation blindly. A proper assessment of cash flows, ongoing EMIs, short-term milestones, and other important investments must come first. The lock-in feature of NPS already ensures discipline, but the real benefit will come when employees maintain consistency in contributions and stick to equity exposure without frequent switching, ensuring better retirement outcomes,” says Rathi of 1 Finance.

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