NEW PENSION SCHEME (NPS)

From 1st April 2009 onwards, any individual will be able to start a New Pension System (NPS) account and start saving up for a pension. Of course, the system is not just for private individuals, the pension of all central government employees who have joined service after 01/01 2004 are also part of NPS.

The design of the new system is simple. The National Security Depository Limited (NSDL) will be record keeper and six entities selected by PFRDA will be the fund managers. The fund managers will manage different plans that comprise of equity, government securities and corporate bonds. These plans will obviously have different combinations of risk and returns.

The distinguishing feature of the NPS is the amazingly low cost. The annual cost of record-keping is Rs 380, each transaction will cost Rs 6 and the most amazing of all-the investment management fee is 0.009 % p.a. Why is low cost so important? Because the magic of compounding over the long time horizonwill make its beneficial impact magnified massively.

There are some drawbacks to the NPS too. The biggest is that it really is a pension scheme, not an investment. You can't withdraw the money till you are sixty years old, except for critical illnesses and for building or buying one house. Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity. That's not a bad thing by itself.

Aanother big disadvantage of the NPS is that its gains will be taxable. However, this is obviously a blunder on the government's part and one expects it to be corrected if the NPS is to take off at all. Either NPS gains will be made tax-free or competing systems like the EPFO will also be made taxable.