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Why is the Govt. tweaking the NPS?

Context:

  • PFRDA has recently announced that the National Pension System (NPS) will no longer compel investors to convert 40% of their accumulated retirement corpus into an annuity, as poor yields on annuities and high inflation are translating into negative returns.
  • Over the past year, NPS has enormously delivered high returns and there was a drastic difference between February and March return because stock markets crashed in March 2020.

Relevance:

GS-III: Indian Economy (Growth & Development of Indian Economy), GS-II: Social Justice (Government Initiatives, Management and Development of Social Sector)

Dimensions of the Article:

  1. Who can join NPS?
  2. NPS Benefits
  3. The story so far about NPS
  4. What overhaul is the PFRDA planning?
  5. What prompted this rethink?

Who can join NPS?

Any employee from public, private and even the unorganised sectors can opt for this. Personnel from the armed forces are exempted. The scheme is open to all across industries and locations.

The other eligibility criteria for opening an NPS account:

  1. Must be an Indian citizen.
  2. Must be between the ages of 18 and 65.
  3. Must be KYC compliant.
  4. Must not have a pre-existing NPS account.

NPS Benefits

  • NPS offers returns higher than traditional instruments like the PPF (Public Provident Fund).
  • It offers many investment options to subscribers who also have a say in where their funds are invested.
  • The NPS reduces the retirement liabilities of the government.
  • If the subscriber has been investing for at least three years, he/she can withdraw up to 25% for certain purposes before retirement (age 60). This withdrawal can be done up to 3 times with a gap of at least 5 years between each withdrawal. These restrictions are only for tier I and not tier II accounts.
  • The entire amount cannot be withdrawn by the account-holder on retirement [Changes to be introduced]. As of April 2021, 60% can be withdrawn which has now been made tax-free. The rest 40% has to be kept aside so that the subscriber can receive a regular pension from an insurance firm.

The story so far about NPS

  • Started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension System (NPS) has been open for individuals from all walks of life to participate and build a retirement nest-egg.
  • Given the dominance of informal employment in India, the Employees’ Provident Fund Organisation, which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce.
  • The NPS has been gradually growing in size and now manages ₹5.78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes.
  • Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement.
  • The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.

What overhaul is the PFRDA planning?

  • The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement.
  • With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise.
  • Members who accumulate up to ₹2 lakh in their NPS account at the time of retirement are exempted from the mandatory annuitisation, and can withdraw the full amount.
  • Separately, the regulator has decided that the annuity purchase stipulation for 40% of members’ retirement corpus should be dropped altogether. Legislative amendments to this effect are being worked out for Parliament’s approval.

What prompted this rethink?

  • Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause.
  • “If someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee once the person dies, the rates are varying between 5% and 5.5%.
  • Since annuities are taxable, deducting the tax and factoring in the inflation means annuities are yielding negative returns”.
  • With retail inflation running at about 5%-6% over the past year, the returns on annuities are, in fact, negative, even if one does not factor in the tax.
  • To avoid forcing people into such an unattractive investment, the regulator has now proposed to give members a choice to retain 40% of their corpus with the NPS fund managers even after retirement.
  • This, the PFRDA chief believes, will allow them to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds.
  • While this change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ₹2 lakh to ₹5 lakh is being done immediately.
  • “Suppose somebody reached ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000, which, today, will give an income of ₹400 or ₹450 a month — a pittance.
  • So, now, we will allow those with savings up to ₹5 lakh to take the entire corpus out if they choose,” the PFRDA chief said.

-Source: The Hindu

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October 2022
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