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WITH the launch of New Pension Scheme (NPS) comes the government’s attempt to offer a first of its kind social security plan. The long awaited plan was finally launched on May 1, 2009 after being in the pipeline for five years. Wealth tries to answer the 10 most commonly asked questions about this scheme.
Q1. What is NPS?
NPS is a pension plan where you can invest during your working years and withdraw when you retire. Until May 1 2009, the plan was available for central government employees only. But it is now thrown open to the citizens of the country.
The current NPS launched is of tier-I type. The typical feature of tier I type plan is that it does not allow you to make any withdrawals before 60 years. However, there can be exceptions in situations like a medical emergency or buying your first house.
If you don't like the idea of this long lock in, you would need to wait for the tier II type of fund, which is yet to be launched. D Swarup, Chairman of Pension Fund Regulatory Development Authority (PFRDA), said in an interview with CNBC TV18, "The tier II plan will be out before the end of this year."
Click her to watch the full video interview with D Swarup
Q2. How does it work?
NPS works like a mutual fund (MF). If you want to invest in the NPS, you can choose from three funds or a mix of funds:
Fund E: This invests up to 50 per cent in the equity market
Fund C: This fund invests 100 per cent in corporate bonds
Fund G: This fund invests 200 per cent in government securities
If you are confused about how much to invest in which fund, you can leave it to the auto selection option. Through this option, 15 per cent of your money will be invested in equity, 45 per cent in corporate bond and 40 per cent in government bonds.
However, after 36 years of age, your equity and corporate bonds exposure will reduce, but it will be compensated with higher investment in government bonds. The maximum cap in government bonds will be 80 per cent. Equity and corporate bonds will have 10 per cent each investment proportion.
Q3. Whom should I approach to invest?
These fund are managed by six asset management companies (AMC): State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance, appointed by the PFRDA. Swarup says, "You have the liberty to choose, change your fund manager every year unlike mutual fund or unit linked insurance plans where you are tied to the same fund manger throughout the term of the product."
All AMCs have to follow the guidelines laid out by PFRDA since it’s the ruling authority.
Next page: How much can you invest?
Illustration: Vaibhav Shirke
