National Pension System undergoes 5 key changes: PFRDA is proposing the 70 years threshold as the maximum age to join NPS, while exit age may also be revised to 75 years.
The awareness around retirement product-National Pension System is growing with 38 per cent growth in AUM and 23 per cent in number of subscribers under the agile supervision of Pension Fund Regulatory and Development Authority of India (PFRDA). There shall soon be key announcements to make it more attractive, expanding its reach across India. It is important to know what has been proposed:
1.Maximum entry and exit age to be increased
As per rules people in the age group of 18 to 65 years can join the NPS. The PFRDA is thinking about extending the limit to 70 years. The exit age may also be revised to 75 years from the current 70 years. When the entry limit was increased to age 65 from the 60 years, more than 15,000 60-plus people subscribed to the NPS. It will be worthwhile to raise the limit of the maximum entry and exit age to 70 years and 75 years respectively as the life expectancy too is increasing. However, these are just enabling conditions and not mandatory ones.
2.Guaranteed products
Keeping conservative investors in mind, the pension regulator will soon launch a pension scheme offering minimum assured return to the subscribers in next one or two months. The reason behind it-NPS is a market-linked product that invests in equity, corporate bond, and government securities. It is not predictable what shall be the overall return that one may earn by the retirement. Pension advisory committee has already given an approval to the guaranteed product. The actuarial firm is yet to design it.
3.Better earning options
The subscribers need to invest 40 per cent of their NPS corpus with one of the 12 insurance companies selected by the NPS. The annuity rates have come down so much that if one opts for return of purchase price option in annuities, the interest rate varies between 5 and 6 per cent. The amount received by way of annuity is taxable and after considering the taxes and inflation, it ends up giving negative return. Innovative pay out options are also on cards, soon to be offered to the subscribers, by which the subscribers shall be allowed to retain 40 per cent with the pension fund managers to earn better return. A mixture of annuity and systemic withdrawal plans are proposed. However, this might need an intervention by IRDA and SEBI as well if at all any of the proposed changes fall within their purview.
4.Commutation of the full amount
NPS subscribers receive 60 per cent of their investment after retirement as commutation, while 40 per cent needs to be invested with one of the insurance companies to receive pension. The subscribers who end up accumulating only up to Rs 2 lakh by the retirement age can withdraw the full amount. The PFRDA now considers increasing this limit to Rs 5 lakh. Again, this being just a facilitating condition, if a subscriber does not want to commute the full amount, they may go ahead with the annuity option.
5.Expansion of the distribution network
As of now only institutions can get a distribution licence. They are called Point of Presence (POP). Expansion of the distribution channel is under pipeline. Individuals could be considered as distribution partners. However, instead of hiring individual POPs, existing POP can recruit them as their sub-entities. Rationalisation of the commission fee for POPs as is done for pension fund managers on fund management fee is also one of the factors given weightage to.
Bhoi Smrutirekha Dharanidhar