NPS vs insurance pension plans: Which is better for you?

Yashish Dahiya
Policybazaar.com

Everybody dreams of a healthy and peaceful retired life and your monthly pension is what ensures that you enjoy the golden days of your life to the fullest. Thus in order to build up a suitable retired corpus we started to bank upon, Life Insurers promoted pension schemes, Mutual funds with a long term horizon or the mandatory savings under EPF and PPF. The Pension schemes promoted by Life Insurers were good but were always marred by the controversy surrounding in terms of charges deducted from the policy. Hence, making them one of the only other non-preferred choice available.

On May 1, 2009 the Government of India launched the New Pension scheme (NPS) to help individuals develop a pension corpus who were not a part of the regular pension saving schemes and for all other individuals too. NPS allows you to invest while you are working and withdraw your investment at the time of retirement which is fixed at 60 years.

But since the costs incurred in this options were high and the fund managers being forced to keep charges to customer low, such a scheme was never publicized much. Taking an example, for me as a fund manager all I would have got is Rs 9 for managing Rs 10 lakhs, thus these were never promoted by fund managers. NPS (National Pension scheme) has now been available to the consumer for about 3 yrs now but has failed to take off as the distributors have no incentive. But this is about the change, as per the new guidelines the Pension Fund Regulatory and Development Authority is all set to revamp and popularize, which as per me is the only genuine pension product in the country after newly launched Unit-linked Pension Plans.

There are 2 types of account under NPS – tier I (non withdraw-able) and tier II (withdraw-able). Under the tier I account, you would have to pay a minimum payment of Rs 500/month or Rs 6000 annually till the time you reach 60 years of age. No withdrawals are allowed from this account before you reach the age of 60. Tier II has no such limit – you are free to invest any amount when you want. Also, as long as you maintain a certain minimum amount, you are free to withdraw from tier II account as per your need.
But the catch here is, one can open a Tier-II account only if one has an active Tier-I account. Tier-I is a basic pension account with restrictions on withdrawal, Tier-II is a voluntary savings option from which a person can withdraw money freely.

The other things that work in for of NPS include, the restrictions that placed on withdrawal of funds from the Tier 1 account. When a consumer withdraws money from the Tier I account, a part of the corpus at the end of the tenure has to be used to buy annuity, which gives regular payments in lieu of a lump sum. While Partial withdrawals are also allowed they come with some amount of rigidity. What the lock in and rigidity in withdrawals do is, ensure that the person remains invested for a longer period of time and utilizes the money invested in NPS for the right objective.

When it comes to investment, NPS can be compared to ULIP Pension Funds. Offering you with an option to invest in both Equity Instruments and Government based securities. Currently the NPS offers you 4 different investment avenues:

High Equity Option: This fund can invest up-to 50% in the equity market and can give high returns. But it also comes with a risk. This investment is suitable for young people who are starting with their careers or middle aged couples with lesser liabilities or dependents.

Average Risk: This fund Invests in corporate bonds and equities and comes with moderate risk with moderate returns. It is suitable for middle aged couples.

Low Risk Option: This fund invests completely in government securities. These securities are risk free and give lower returns than the options presented above.

Auto Allocation Option: If you are not sure about how to invest, you leave it on the auto-selection option. Through this option:

• 15 per cent of your money will be invested in equity,
• 45 per cent in corporate bond and
• 40 per cent in government bonds.

NPS allows you to withdraw 60% of your total corpus after you reach the age of 60, leaving the remaining 40% for a recurring monthly annuity.

NPS helps resolve the gap that is there for me as an individual to build up a respectable corpus. It also works better than EPF and PPF, but when it comes to returns versus to Mutual Funds and the newly launched Unit-linked Pension Plans we would need to judge it on far more parameters.