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New Delhi: A secured future and a comfortable retirement is the biggest dream of every person. But one big challenge often comes in the way of this dream — inflation. Will the savings you are making today be enough to meet your needs after 20 years? To ensure this, preparations are being made for a major change in the National Pension System (NPS). The Pension Fund Regulatory and Development Authority (PFRDA) has released a consultation paper, which aims to transform NPS from just a 'savings plan' to a 'guaranteed pension system'.
The NPS was started in 2004 for government employees and it was opened to all Indian citizens in 2009. Over the years, it has built a strong base of investors due to excellent returns and tax savings. However, its biggest drawback is that it does not guarantee any 'fixed' or 'predictable' pension after retirement.
In the current system, your money is invested in the market and the returns depend on that. On retirement, you get a part as a lump sum and buy an annuity plan from the rest, which gives you a pension.
Among the new ideas that the regulator has introduced, the first model is for those who want some flexibility. This model combines a Systematic Withdrawal Plan (SWP) with an annuity.
In this system, there will be no direct guarantee of pension amount or benefit, but investors will be able to estimate their pension based on a certain calculation. A minimum contribution of 20 years will be required for this plan. An investment strategy has also been decided, under which 50% of the money will be invested in equity (stock market) till the age of 45 years and thereafter it will be gradually reduced.
On retirement, the investor will initially be given 4.5% of their annuity fund monthly through SWP. It will also increase by 0.25% every year for 10 years. When the investor attains the age of 70 years, then a period of 20 years and lifetime annuity will be purchased from the remaining amount.
The second model is considered the most revolutionary. This is for those investors who want them to get a fixed pension every month and that pension continues to increase due to inflation.
This plan will determine the amount of pension that customers receive in the first year after retirement. Thereafter, every year your pension will be increased based on the Consumer Price Index (CPI-IW) i.e. inflation rate. This means that if inflation rises, your pension will also increase, which will not burden your pocket. Contribution of 20 years will also be mandatory for this scheme.
To meet this guarantee, the fund will be split into two parts. The first part, which will give you a fixed pension, will be invested in safer options like government securities and high-rating bonds. The second part, which will increase the pension in accordance with inflation, up to 25% of the amount will be invested in equity so that you can get higher returns.
