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Home >Money >Personal Finance >Will PFRDA’s new NPS entry, exit norms benefit investors?

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he Pension Fund Regulatory and Development Authority (PFRDA) has now increased the age limit for joining the National Pension System (NPS) from 65 years to 70 years with no cap on the maximum investment limit. Moreover, the exit age limit has also been extended to 75 years. Earlier, the entry age to open an NPS account was 18 to 60 years, which later got increased to 65 years.

Adhil Shetty, chief executive officer, BankBazaar.com, said that by increasing the maximum entry age for NPS, PFRDA has given senior citizens an avenue to invest safely and easily in market-linked instruments and earn returns beyond what traditional instruments such as fixed deposits (FDs) provide. This is beneficial, especially in the light of falling returns from small savings across the board.

“Several NPS schemes have averaged over 10% CAGR (compounded annual growth rate) from the time of inception, which is 2-5% higher than traditional investments, and it is now possible to stay invested for longer and accumulate a bigger corpus," Shetty added.

The regulator has also allowed subscribers to withdraw the entire accumulated pension corpus in a lump sum if it is less than or equal to 5 lakh. This way, the subscriber is not required to purchase any annuity plan from that amount. However, if the accumulated pension corpus exceeds 5 lakh, subscribers have to mandatorily purchase an immediate annuity plan from an insurance company.

Let us assume you have reached the age of superannuation, i.e., 60 years, and have accumulated a retirement corpus of 5 lakh. You have withdrawn 60% of it as a lump sum (instead of 100%) and with the remaining 40%, i.e., 2 lakh, you have purchased an annuity plan that would provide a regular monthly pension income. In this case, it will fetch an income ranging between 1,200 and 1,500 per month, which will not meet your monthly expenditure at the time of retirement.

Rather, getting a 100% lump sum amount can help you fulfil your financial goals such as a child’s wedding or buying a plot or house.

“The mandatory annuity purchase for 40% of the accumulated corpus, at the age of 60, under the scheme takes away the investor’s control over the entire corpus," said Shetty. “While the threshold below which the entire maturity corpus can be withdrawn without investing in an annuity has been raised from 2 lakh to 5 lakh, this limit is still very low."

“The BankBazaar Aspiration Index data shows that the average salaried individual looks at a retirement corpus of at least 25 lakh to 1 crore. The NPS has the potential to account for a significant percentage of this corpus due to its high market-linked returns. However, unless the annuity requirement is done away with, NPS will provide poor post-retirement returns, and it may not even be able to compete with a mutual fund that allows you full control over your corpus," he added.

Besides, in the case of pre-mature exit, the regulator also stated that the subscriber can withdraw a 100% lump sum amount if the total accumulated pension corpus is less than or equal to 2.5 lakh.

Through its gazette notification, the regulator has increased the threshold in this case from 1 lakh previously.

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