It was a Farewell to be remembered forever by Tennis Fans! A moment filled with tears for the one who was retiring as well as those who have sweated all their careers with vengeance to defeat him on a tennis court.

While Roger may not have to worry about his post-retirement plans, are you assured about your post retirement life?

Retirement is the time when one would like to spend their days doing what they love — travel, pursue hobbies, social work etc. However, not all people get to live a comfortable retirement life given that regular flow of money which they were used to is no more there for them and they now have to dip into their life-long savings to fund their daily requirements.

India is on its way to becoming the most populous nation in the world by 2025, surpassing China. By 2050, the number of Indians above the age of 65 will cross 200 million from about 80-90 million currently, while the number of Indians above 80 years of age will be around 45 million, second only to China.

Problem

It is not surprising that most Indians still expect to depend on their children to provide them financial support in their post retirement life, many yet to start saving for retirement, as per recent survey done by ‘Digital and Financial Inclusion Barometer’ survey by Sambodhi and pinBox Solutions, research firms and global digital micro-pension inclusion platform. But with growing trend of Nuclearization of Families and growing consumption needs it may become all the more difficult to ensure a stable post retirement life without proper financial savings and planning. Rural Indians are more vulnerable in their financial planning needs, and also save less with often due to uncertain income flows while there is an encouraging trend of rising financial awareness amongst rural population.

With average life expectancy expected to increase to over 75 years by 2050 from the present level of close to 65 years, the number of post-retirement years without regular income is also increasing consequently. It therefore becomes more critical now than ever before to ensure regular income for life after retirement.

National Pension System – A Pack of Aces!

One of the best solutions for savings for retirement should ideally have the characteristics of flexible Asset Allocation, Professional investment management, assured Pension system inbuilt and Low cost.

The icing on the cake to be the Tax benefit at the time of investing, during the earning period and at the time of withdrawal of the savings.

National Pension System (NPS) has all the above characteristics of an ideal retirement savings package.

A brief summary of the key characteristics of the National Pension System will elucidate that for you:

Features of NPS

• Asset Allocation:

  NPS offers subscribers options and flexibility to invest across multiple asset classes ranging from Equity, Government Securities, Corporate Bonds and Alternate Assets. It also offers choices to keep the asset allocation in Auto mode under pre-determined asset allocation path or actively choose their allocation across the asset classes. Subscribers also get to change their Asset allocation 4 times in a financial year

• Professional Investment Management:

  NPS Funds are managed by Professional Investment Management Firms with adequate expertise in the respective field. Currently, there are 11 Pension Fund Managers for the subscribers to choose from. Further they also have the option to change their Fund Manager once in a financial year.

• Low Cost:

  NPS can truly boast of one of the lowest cost retirement savings products across the world. Starting at 9bps. Ohh! Just in case you are wondering what is ‘bps’ a.k.a. basis points, it is expressed as 0.09% (meaning 9 paise for every Rs. 100/-)

  While there are other charges incidental to management and maintenance of NPS account, the overall package is one of the most competitive products in terms of cost vs value.

• Market Linked Returns:

  NPS provides the opportunity to Subscribers to generate market linked returns on their retirement savings. Equity markets over the long period of time have been able to generate higher inflation adjusted returns than any other traditional debt asset classes albeit it does present its own set of volatility.

• Tax Benefit:

  While we did say that NPS packs in itself a pack of Aces, here we can say it packs a set ‘E’ces meaning that NPS as a Savings product provides subscribers a truly Exempt-Exempt-Exempt tax benefit experience. Wondering what it is let us take an example:

  A Subscriber opens a NPS account and invests some amount in it. He gets the benefit of Tax exempt at 3 levels as given below:

  • First ‘E’ - The investor shall be eligible to claim deduction of the investment made under various sections like Sec. 80C, 80 CCD (1B) & 80 CCD (2) which can range up to Rs. 9.5 lakhs (Unbelievable!! Isn’t it? Click here to know more about this. Put a link to the Slide we have prepared to show the tax benefits under various section for NPS.)
  • Second ‘E’ – Suppose the investor earns x% returns on the invested amount. The earnings on the invested amount are also exempted from tax during the period of investment. Isn’t it wonderful?
  • Third ‘E’ – As the investor turns 60 years of age, they can withdraw up to 60 % corpus built under the NPS account, which is Yes, you guessed it right! Exempted from Tax! (it’s a straight Set of E’s!)
• Annuity Package –

  The last part of any retirement savings product is to provide regular cash flows during the post retirement years which is ensured under NPS through Compulsory Annuity purchase for a minimum amount of 40% of Corpus at the time of Retirement. The Annuity shall ensure regular cash flow to you and can continue to be paid to your spouse post your life.

• Regulator
  

  NPS is Well regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.

Why you need to start investing in NPS today?

There is a famous quote of Benjamin Franklin which says “A little neglect may breed mischief” to remind everyone the importance of seemingly trivial repair parts and inventory replenishment. While we may not be talking about any repair or inventory, let the message be not lost about the importance of starting early in life to prepare for a post retired life by having reasons which may cost a lot over the long period of time.

One of the frequently used excuses of delaying investment for retirement is that we are too young to start now, oh no! wait I have still got to buy my dream home! That car which I have been dreaming for long….Oh my God! I am yet to get married and start a family!

Let me give you an example of the result of such delay in investing for retirement:

In the above example the person starting at the age of 30 invested just Rs. 3 lakhs less than the person starting at 25 (Rs. 5000 per month for 5 years) and see the difference of Corpus of both at retirement.

The Rs. 3 lakhs missed out resulted in a loss of more than Rs. 35 lakhs! You can take your time to sink that in! But as we said earlier “A little neglect may breed mischief” can be very well exemplified in the above example.

It is recommended to start investing for retirement at an early age as ‘Time’ is indeed the ‘Magic Potion’ in the power of compounding which is not very much appreciated in developing markets like India. As people age, their asset allocation has to undergo change. With Equities being the predominant portion of retirement portfolio and gradually increasing debt as they age.

Investors believe that regular savings in Employees Provident Fund and Public Provident Fund would suffice for their retirement needs along with some additional personal savings which has proved to be highly dangerous due to big mismatch with the reality post retirement.

Here we would like to sign out reminding ourselves of the below lines from "The Horseshoe Nails" by James Baldwin (1924-1987):

“For the want of a nail the shoe was lost,
For the want of a shoe the horse was lost,
For the want of a horse the rider was lost,
For the want of a rider the battle was lost,
For the want of a battle the kingdom was lost,
And all for the want of a horseshoe-nail.”

- "The Horseshoe Nails" by James Baldwin (1924-1987)

On a lighter Note:

कल करे सो आज कर, आज करे सो अब,
साठ पे रिटायर हो जाएगा, NPS करेगा कब।

Kal kare so aaj kar, aaj kare so ab,
Satth pe retire ho jaayega, NPS karega kab!

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.