If you are looking for an investment tool to build a retirement corpus for pension, the National Pension System (NPS) can be ideal to achieve this goal. NPS is one of the most-preferred instruments for retirement planning. It is a government-sponsored scheme which allows individuals to contribute regularly to a pension account while they are earning. Post NPS maturity, subscribers can withdraw a lumpsum amount from the corpus and invest the remaining to buy an annuity for a fixed monthly pension.
“National Pension Scheme is an investment avenue designed to meet regular expenses after retirement when existing income sources (such as salary) cease to continue. NPS offers the best of both worlds, with comparatively lower risk than equity and higher returns than PPF or fixed deposits,” said Pranjal Kamra, CEO, Finology Ventures.
NPS investments: Active and Auto-Choice options
In NPS, there are four asset classes, i.e., equity, corporate debt, government bonds and alternative investment funds. And the investor has two options to invest in NPS — active and auto choice
The active choice option allows subscribers to decide how the money should be invested in different asset classes including stocks, government securities and fixed instruments other than government securities. Under this option, the maximum that can be invested in equity is 75 per cent of the overall corpus. However, once the subscriber crosses the age of 50, the equity allocation will decrease.
The auto choice option is the default option that invests money automatically, taking into consideration the age of the subscriber. Under this option, as the age of the subscriber increases, the exposure to equity and corporate debt decreases. There are three different options available within auto choice – aggressive, moderate and conservative. An individual can choose any option depending on his or her risk profile.
NPS annuity rule: How it works
Currently subscribers cannot withdraw the entire accumulated NPS corpus at maturity. One must invest a minimum 40 per cent of the total NPS corpus to buy an annuity plan from a life insurance company. This annuity amount is a regular pension that will be given to subscribers after retirement.
The remaining 60 per cent can be withdrawn as lumpsum. However, one can use some portion of this lumpsum to purchase the annuity. Thus, NPS subscribers can use more than 40 per cent of the corpus and up to 100 per cent to buy annuity.
NPS calculator: How can you get Rs 75,000 pension per month after retirement
If you want to earn more than Rs 75,000 as pension per month from you NPS investment, here is how much contribution you must make:
To earn a pension of over Rs 75,000 a month, the total accumulated NPS corpus must be Rs 3.83 crore at maturity (i.e., age of 60 years). Here we are assuming that we only use the mandatory 40 per cent of the NPS corpus to purchase the annuity. The annuity rate assumed is at 6 per cent per annum.
Here is how to accumulate the NPS corpus of Rs 3.83 crore by the time you retire.
Like any other long-term investment scheme, the return from NPS depends on when you start investing. If you start early and contribute regularly, you will have a solid retirement corpus.
For example, a 25-year-old is investing Rs 10,000 monthly in NPS for the next 35 years (i.e., till the age of 60 years). Assuming 10 per cent return per annum, the total NPS investment will grow to Rs 3,82,82,768 at the time of maturity.
If she uses 40 per cent of the total corpus to purchase annuity, she will get a pension of Rs 76,566 per month after retirement.
Similarly, for those who start investing in NPS at the age of 30, the monthly contribution must be Rs 16,500 for the next 30 years to get a Rs 75,218 monthly pension, post retirement.
If one joins NPS at the age of 35, he or she needs to invest over Rs 28,500 monthly for the next 25 years for a fixed pension of Rs 76,260 after retirement.
To simplify the calculation, we assume annuity rates will be 6 per cent and return from NPS will be 10 per cent. The returns may vary, depending on market conditions.
You can use this NPS calculator to estimate your monthly pension in future and invest accordingly. Do remember to adjust for inflation while planning for your retirement corpus.