The National Pension System (NPS) – De-Mystified

The National Pension System is a retirement planning option that has been made available to the citizens of India in the year 2009. Not many people know what it is and how it can be used for retirement planning. The purpose of this article is to elaborate on that scheme and help people understand and use the National Pension System in their retirement plan.

So, lets get started!!!

What is the National Pension System ?

The New Pension System or The NPS as we will be referring to it in this article, is a new voluntary contributory pension scheme introduced by the Central Government through Pension Fund Regulatory and Development Authority (PFRDA) to promote old age income security.
The aim of the NPS is to provide a sumptuous retirement corpus for the working class of India (Something like Social Security in USA) when they retire. Though it is not a compulsory contribution option like Social Security, this scheme is purely voluntary. The scheme is available to all citizens of India who are not Government Employees.

Under the NPS, individuals can open a personal retirement account with the government through the PFRDA and can set aside and save a pension corpus during their work life to meet financial needs post retirement. There are various investment options available for the investors who wish to subscribe to the National Pension System. The amount invested in the scheme earns returns depending on the investment options selected by the investor.

At the time of withdrawal (When the investor retires) the subscribers have to invest a portion of their accumulated pension money under the Scheme to purchase a life annuity from an IRDA regulated life insurance company and the balance may be withdrawn in full. The amount the investor can withdraw and the timeframe after which it can be withdrawn are subject to certain conditions.

Dont worry just yet, we will cover that too ...

Who are the people involved in the National Pension System?

There are many people or rather the correct technical term would be intermediaries involved in the NPS. They are:
1. The Pension Fund Regulatory and Development Authority (PFRDA) of India
2. The Central Record Keeping Agency (CRA)
3. Pension Fund Managers
4. Annuity Service Providers
5. Trust & Trustee Bank
6. Point of Presence

Let’s look into these one by one.

Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA is the regulator for the NPS. PFRDA is responsible for registration of various intermediaries in the system such as Central Record Keeping Agency (CRA), Pension Funds, Custodians, NPS Trustee Bank, etc. The PFRDA also monitors the performance of the various intermediaries and ensure that all stakeholders comply with the guidelines/regulations issued by PFRDA from time to time.

The most important responsibility of the PFRDA is to ensure that the interest of the Citizens who invest in the scheme are protected which essentially means they are there to look after our best interest.

Central Record-keeping Agency (CRA)

The record-keeping, administration and customer service functions for all subscribers of the New Pension System will be centralized and performed by the CRA. The CRA will, on the basis of instructions received from subscribers, transmit such instructions to the appointed Pension Funds on a regular basis. The CRA will also provide periodic, consolidated PRAN statements to each subscriber.

The National Securities Depository Limited (NSDL) has been appointed as the CRA for the NPS.

Pension Fund Managers (PFMs)

The money deposited by investors is invested into a pension fund which is managed by designated fund managers. There are a few leading professional firms that have been appointed to act as the Pension Fund Managers. They invest the subscriber’s money into various schemes like equities or bonds etc for further investment.

The Pension Funds are required to invest strictly in accordance with the guidelines issued by the government and PFRDA. The NAV of each and every scheme in the Pension Funds would be communicated to the CRA and the investors regularly.

NPS allows you to choose from any one of the following six entities as PF to manage your pension fund:
1. ICICI Prudential Pension Funds Management Company Limited
2. IDFC Pension Fund Management Company Limited
3. Kotak Mahindra Pension Fund Limited
4. Reliance Capital Pension Fund Limited
5. SBI Pension Funds Private Limited
6. UTI Retirement Solution Limited
7. Annuity Service Provider (ASP)

Annuity Service Providers:

The Annuity Service Providers are responsible for delivering a regular monthly pension to the investor after they attain their retirement age of 60 yrs. The PFRDA is in process of appointing the Annuity Service Provider(s) for the NPS accounts. Upon appointment of the same, you will be able to select any Annuity Service Provider for your account as per your choice at the time of withdrawal of contribution from your NPS account or on attaining 60 years of age.

Trust & Trustee Bank (TB)

The Trust established under the NPS, is responsible for taking care of the funds under the NPS and is the registered owner of all NPS assets. The trust holds an account with as the NPS Trustee Bank, i.e Bank of India. NPS Trustee Bank facilitates fund transfers across various entities of NPS system which include, PFM, Annuity Service Providers, subscriber, etc. The NPS Trust is being administered by the Board of Trustees, as decided by the PFRDA.

Point of Presence (PoP)

PoP is the first point of interaction between the voluntary subscriber and the NPS architecture. The PoP is responsible for performing functions relating to registration of subscribers, undertaking Know Your Customer (KYC) verification, receiving contributions and instructions from subscribers and transmission of the same to designated NPS intermediaries.

How to invest in NPS?

The PoP is the entity through which an investor can invest into the National Pension Scheme. The Investor who wishes to subscribe to the NPS can contact the PoP and become an investor in the Pension Scheme.

Types of NPS Accounts

The NPS currently has two types of Accounts available for the subscribers. They are:
1. Tier 1 Account – This is a non-withdrawable account wherein you will not be able to take out your investments until you reach your retirement age of 60 years. If you want to withdraw the money from your Tier 1 account before you reach 60 years, you would be required to invest atleast 80% of the money in your account to purchase a life annuity from an Annuity Provider (Life Insurance Companies). You can only withdraw the remaining 20% of your balance.
2. Tier II Account – To open a Tier 2 account, you need to have an active tier 1 account. You can withdraw your savings from this account whenever you want.


Benefits of Investing in NPS

There are a lot of benefits of investing in the NPS. They are:
1. You can choose the amount you want to set aside and save every year
2. All you have to do is to open an account with any one of the POP and get an Account
3. You can choose your own investment option and Pension fund and see your money grow
4. You can operate your account from anywhere in the country , even if you change your city, job or pension fund manager
5. NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS trust

I know that, by now you will have numerous questions about the NPS. So, in the next article we are going to cover them all.

Happy Retirement!!!