Pension Planning: The Big NRI Blindspot

By design or by choice, we find that Non-resident Indians (NRIs) are a key investor segment in India. This may be owing to multiple factors, including an emotional drive for owning significant assets in the home country, and benefitting from the ‘India Growth’ story. My discussions with various NRIs , especially those based out of the Middle-East, lead me to believe that they plan for an eventuality when they would return to settle in India once their working life in the foreign country is over. Hence their significant investments are in equity, fixed income instruments, and real estate in India. In fact, 2022 turned out to be a record year^ for NRI investments in India’s real-estate sector.

Despite such keen sense of investment, I have seen NRIs continue to struggle with a more strategic and goal-based approach to investing, especially when it comes to retirement and pension planning. While the reasons for the same remain a mystery, I believe it has much to do with the hard work ethics engrained in NRIs and OCIs, especially the generation that migrated prior to the IT revolution. For a community that has worked relentlessly to establish a position of pride for themselves in a foreign society, it is tough to accept retirement as the natural course of things. Most NRIs being technical / health experts (white and blue collared) in their respective fields, may not be the most financially literate; hence, they would look for advice from investment experts/advisors for their investment requirements.

The Case for Pension Planning

Retirement benefits are getting impacted in countries such as the U.S. and U.K., and a globally volatile environment is giving way to a future filled with cyclic unpredictability across economies. This demands that NRIs , especially in their 30s and 40s, to take a hard look at what retirement holds for them. Some of the top factors they need to consider before arriving at retirement goals and pension planning would be:

• Preferred country of retirement in a world with fast-changing economic dynamics
• Tentative retirement age
• Career 2.0 plans and financial feasibility
• Post-retirement lifestyle needs and access to senior care
• Existing investment portfolio and estimated returns for funding post-retirement lifestyle

Reviewing these factors can help NRIs effectively bridge the gap between emotional investing and a future that features comfortable retirement.

The National Pension Scheme Opportunity

A well-diversified portfolio is key to safeguarding an adequate retirement portfolio and pension. This is especially true in the backdrop of NRIs’ and OCIs’ inclination for assets* that are subject to market risk (mutual funds), low on liquidity (real-estate), and are fixed in nature (NRE and NRO).

In this context, the National Pension Scheme (NPS) is a rather untapped opportunity. Designed for the resident Indian, it offers a host of features that make it equally ideal for NRIs and Overseas Citizens of India (OCIs) in the current global economic scenario. The annual upper limit for investment is 10% of gross income and stays at Rs.1,50,000, u/s 80CCD1. NPS also offers special provision of tax deduction under sub section 80 CCD1B investment upto Rs 50,000. Accordingly, it offers the potential to build a well-diversified, tax-free pension corpus for those starting early, between mid-20s to 40s. Even if one were not elated from the tax benefit that this product offers; significant fund returns can also be made from the fact that this product is the lowest cost investment product possible in the world.

Here are the key reasons why I believe NRIs and OCIs could do well to include NPS as part of their portfolio diversification and pension planning strategy:

• Low entry barrier as compared to assets such as real-estate allows early investing; the resulting compounding growth has the potential to transform pension corpus tremendously in the long-run
• Potential for higher returns as compared to traditional fixed return assets makes it easier to build a corpus that serves retirement goals
• Choice to link a major portion of the investment amount to the equity market basis one’s risk appetite
• Flexibility to seamlessly toggle investment between debt and equity basis evolving needs and economic scenarios
• Opportunity to invest regularly and average out market volatility effectively
• Access to India’s equity market without indirect exposure (through stocks) to benefit from the India Growth story

Reasons to Begin in 2023

For NRIs contemplating the asset class, CY 2023 serves as the year; which may see periods of economic uncertainty. In such a scenario, NPS allows subscribers the choice to switch between debt and equity exposure and vice versa, making decisions easier. More importantly, its low entry barrier and minimal installments make it ideal for younger NRIs who are still building their wealth and want to have substantial cash in the bank in case of job losses;, a scenario that seems to be playing out quite actively in the recent times. NPS allows systematic investments to meet future goals without leading to present-day cash stress. Finally, it remains a hassle-free asset class that can be tracked and managed from the comfort of a smartphone unlike luxury real-estate or direct equity investments which may demand far more much more involvement and active research and investment decision making.

Views are personal: The author – Kurian Jose is the CEO of Tata Pension Management Private Limited.

Disclaimer The views expressed here in this article is for general information and reading purpose only and does not constitute any guidelines and recommendations on any course of action to be followed by the reader.
The views expressed are of the author and are personal. Tata Pension Management Private Limited (TPMPL) may or may not subscribe to the same. The views expressed in this article are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and TPML will not be liable in any manner for the consequences of such action taken by you. There are no guaranteed or assured returns under any of the schemes managed by TPML. All investments in Pension Funds and Securities are subject to market risks. NAV of Funds may go up or down depending on factors affecting securities markets.