Investing in the National Pension System (NPS) can be a prudent strategy for securing a steady income post-retirement. By making consistent investments in NPS now, you can build a substantial retirement fund for the future, as it is a highly cost-effective way with the lowest fund management charges ranging from 0.09% to 0.03% depending on the AUM.
NPS offers two account types: Tier I and Tier II. The Tier I account is a mandatory pension account with restrictions on withdrawals, ensuring that your savings are preserved for retirement. The Tier II account is optional, offering greater flexibility in accessing your funds.
Upon reaching the age of 60, you’re required to use at least 40% of your NPS corpus to purchase an annuity from a life insurance company, which will then provide a steady income stream. You can withdraw up to 60% of the corpus as a tax-exempt lump sum.
In the case of an early exit before age 60, you can withdraw up to 20% of the corpus as a lump sum, with the remaining 80% required to purchase an annuity, ensuring continued income during retirement.
Let’s examine the potential pension you could draw if you invest Rs 50,000 per month, assuming a 10% annual return on investment and a 6% annuity rate.
Starting at age 30
If you begin investing Rs 50,000 monthly at the age of 30, you will have invested Rs 1.8 crore over 30 years. Assuming a 10% return, this corpus will grow to Rs 11.39 crore by the age of 60. You can withdraw 60% as a lump sum (Rs 6.83 crore) and invest the remaining 40% (Rs 4.55 crore) into an annuity to give a monthly pension, translating to a pension of Rs 2.27 lakh per month.
Starting at age 40
Starting at age 40, with the same monthly investment of Rs 50,000, you’ll have invested Rs 1.20 crore over 20 years. This would grow to Rs 3.82 crore by the age of 60. With 60% withdrawable as a lump sum (Rs 2.29 crore), and the remaining 40% (Rs 1.53 crore) annuitized, you can expect a monthly pension of Rs 76,570.
Starting at age 50
If you start at age 50, investing Rs 50,000 per month for 10 years results in a total investment of Rs 60 lakh. This will grow to Rs 1.03 crore. With 60% lump sum withdrawal (Rs 61.96 lakh), and the remaining 40% (Rs 41.31 lakh) annuitized, you can draw a monthly pension of Rs 20,655.
As the number of years increases the pension amount also decreases, accentuating the power of compounding.
For those preferring smaller contributions, if you start at age 30 and invest Rs 10,000 per month, you can expect a pension of Rs 45,587 per month at 60. Start at age 40 with Rs 10,000 per month, your pension would be Rs 15,314 per month. If you start at age 50, Rs 10,000 per month will yield a pension of Rs 4,131 at 60.
Investment Options
There are two choices in NPS: Active and Auto. Under Active category there are four funds to choose from Equity or E, Corporate Debt or C, Government Securities or G and Alternative Investment Funds or AIF. The maximum equity exposure under E option os 50 percent.
Whereas Under auto option you can have higher equity exposure upto 75% subject to your age. Auto choice gives you three options Agressive, Moderate and Conservative where the equity exposure is highest till 35 years at 75 per cent for aggressive funds. It redeuces to 50 per cent for moderate investors and 25 per cent for conservative investors.
Remember, you can continue contributions until the age of 75, providing flexibility in your retirement planning. NPS is an attractive option for long-term retirement planning given the compounded growth and annuity benefits it offers.