National Pension System: Is your investment in NPS Locked-in

Introduction

The National Pension Scheme is a lifetime savings scheme regulated and authorised by the Central Government of India and the PFRDA. It allows Indian citizens, NRIs and OCIs to invest money into a retirement fund during their working years. Once they reach retirement age, they can withdraw a percentage of the corpus that they accumulated. The remainder is paid out as a monthly pension and is called an NPS annuity. The PFRDA has mandated that a minimum amount of 40% of the total money invested needs to be left in your NPS account against your annuity, the remaining can be withdrawn at the time of retirement.

The NPS is a popular choice among salaried employees (both governmental and non-governmental). It acts as the base level savings for retirement for many older people. While you can invest your money in other assets, or even use other pension schemes, the National Pension Scheme is highly regulated and overseen by the PFRDA (Pension Fund Regulatory and Development Authority). This makes it a relatively safe spot for your hard-earned savings, leading many people to include NPS as part of their financial and investment planning.

What is NPS PRAN?

When you avail of the National Pension Scheme, you will need an account number to reflect your savings, investments and withdrawals. This is provided by the NPS and is called the Permanent Retirement Account. The 12-digit number associated with your account is called the Permanent Retirement Account Number (PRAN), this is similar to how other banks work.

• The PRAN is yours for your entire lifetime
• It allows your account to be accessible from anywhere in India
• A Tier-1 account will not have any withdrawals permitted
• A Tier-2 account is a voluntary savings account and works in the same way as savings accounts offered by banks
• All NPS holders will have a PRAN

How much can I withdraw from NPS?

Withdrawals can be made in several ways from your NPS corpus. Depending on the type of withdrawal, there are strict rules that apply. All NPS subscribers should pay careful attention to the following NPS withdrawal rules:

1. Withdrawal after Maturity - When the NPS subscriber reaches the age of 60 the NPS will mature (you can also choose to defer your account maturity till you reach 75).

• At this point, you will be able to withdraw 60% of the invested amount in a lump sum withdrawal. You cannot withdraw from your pension before the fund matures.
• 40% of the NPS corpus will need to be used to invest in an annuity scheme.
• You can only buy annuity plans from fund managers approved by the PFRDA (this is to ensure the safety of your investments).
• This annuity plan will invest in a variety of financial assets (including equity investments up to 50% of your balance corpus). This will accumulate interest and potentially increase your annuity payments.

To enable elderly folk to take advantage of the National Pension Scheme, new rules have increased the entry age for subscribing to the scheme. Now, citizens, NRIs and OCIs between the ages of 18 and 70 can join the NPS. But if you begin contributing to your NPS at or over 65 years of age, certain rules will apply:

• If you begin the NPS at 65 years or older, you need to invest for a minimum of 3 years (lock-in period). You can withdraw the entire corpus if it amounts to less than 5 lacs. If it is more than 5 lacs the same withdrawal rules apply - only 60% can be withdrawn while 40% needs to be used to buy an annuity plan.
• If you begin your NPS contribution at or above 65 years of age, you can make a partial early withdrawal before 3 years but only up to 20% of the corpus (the remaining will go towards an annuity plan for your monthly pension). If your total corpus does not exceed 2.5 lacs then you may withdraw the entire amount.

2. Withdrawal before Maturity - There are 2 types of withdrawal available before maturity - partial withdrawal and early retirement.

Partial Withdrawal - If you need cash urgently before your NPS matures, you can make a partial claim against your corpus but certain criteria need to be met:

• You need to be a subscriber for at least 3 years
• You can only withdraw 25% of the current corpus
• You need to make your request online through the KFintech - CRA portal or through a POP
• Only certain reasons are acceptable for making a partial withdrawal even if you meet the above criteria, these include the marriage of a child, education of a child, purchase of a house or flat for the first time (with or without your spouse) or medical issues and accidents

Early Voluntary Retirement - If you wish to retire earlier than the retirement age (60 years), you can make a partial withdrawal against your corpus before maturity. Again, some conditions need to be met to be able to claim voluntary retirement NPS withdrawal:

You need to be a subscriber for at least 10 years

• You can withdraw only 20% of the corpus (the balance 80% needs to be put into an annuity plan)
• If the corpus is less than 2.5 lacs then you can withdraw the entire amount

3. Withdrawal Upon Death - If the NPS subscriber dies before maturity, then the legal heir or nominee can withdraw the entire corpus amount with no limitations. Government employee heirs/nominees, however, still need to keep a percentage aside from this corpus towards an annuity plan.

Why invest in NPS?

The NPS allows you to have a sizable, stable income through the annuity component of your plan. This monthly pension will grow depending on how well your fund manager invests the money, but most approved annuity plans have a history of providing good returns. After retirement, you will have no steady source of income hence a pension scheme is a must for self-dependence.

The lump-sum withdrawal component of up to 60% allows you to take care of debts, buy things that you may need and help you to enjoy your retirement well. The main objective behind the NPS was to provide Indian elderly citizens with a safe place to store and invest their hard-earned income so that they have regular financial backing in their old age.

FAQS

Q1. How do I make a partial withdrawal from NPS?

If you meet the conditions and criteria, then you can request a partial withdrawal by logging into the KFintech- CRA clicking on the link and filling in the form for ‘Partial Withdrawal’.  You will need to go to the nearest Point of Presence (POP) if you wish to make the withdrawal offline.

Q2. Can I put more than 40% of my corpus toward my annuity plan?

Yes, 40% is only the minimum amount you need to leave for purchasing your annuity plan. If you wish to have a larger investment you can assign more than 40% to your annuity scheme.

Q3. What is the maximum and minimum age limit for starting NPS?

The minimum age requirement for starting NPS is 18 years, you will need to continue contributions till the age of 60 (you can make partial withdrawals after 3 years and choose a voluntary retirement after 10 years).

The maximum age for starting NPS is 70 years, you can continue contributions till the age of 75 (you will need to contribute for a minimum of 3 years).