NPS becomes more attractive for senior citizens

The raising of the entry age in NPS has opened up an attractive new investment avenue for senior citizens, says Arnav Pandya

Illustration: Uttam Ghosh/Rediff.com

Recently the entry age in the National Pension System (NPS) was raised from 60 to 65. And, this is a reason to smile for many senior citizens who did not enter this product at an earlier age.

With the fall in interest rates of small savings schemes and even the basic savings deposits, senior citizens have been hit the most, as they depend on fixed-income instruments for regular income with adequate safety.

1. Catering to increasing life span

Normally, one does not bother about the upper limit of entry in an instrument. The expectation is that most people who enter NPS would be either young or in their middle age, and they would use NPS for their retirement saving.

But, with increasing life spans, people can no longer follow the traditional format of accumulating till 60 and then living off the accumulated corpus after that age.

Many people will postpone their effective retirement age to 65 or beyond. If they work after 60, they will be in a position to save and invest as well.

Also, many people get a considerable corpus when they retire. They need avenues where they can invest that money.

For such people, the raising of the entry age in NPS to 65 has come as a boon.

2. Raising the investment age

Normally, the accumulation phase in NPS ends at 60. But, there is an option available under which it can be extended beyond that.

If an investor exercises this option, he doesn't have to withdraw his corpus at 60. He can continue to invest till 70. This is the option that all senior citizens will need to exercise to make effective use of NPS.

3. More choice

The raising of entry age has opened up one more investment option for senior citizens. Those who have crossed 60 years of age generally rely on fixed-income instruments like fixed deposits.

However, the traditional means of generating income through fixed-income instruments are now coming under increasing strain, as the interest rates in the economy continue their downward journey.

This has led to the options available to senior citizens getting squeezed. They can now look at the NPS as an option that can help them in their retirement planning.

4. Attractive returns

Past returns from NPS have been attractive. Its equity funds (tier-I) have given a return of 14.37-18.69 per cent over the past year (Source: Value Research).

For an investment horizon of 10 years (60-70), senior citizens with the required risk appetite may take some exposure to equity schemes (the maximum permitted is 50 per cent in the active choice option).

For conservative investors who would like the safety of debt, the returns have been quite attractive.

The tier-I corporate bond funds (C) of NPS have given a return of 9.05-9.62 per cent over the past year, while government bond funds have given a return of 7.32-10.08 per cent.

Longer-term returns, even on the debt side, have also been attractive. This makes NPS an attractive investment even for conservative investors.

5. Choose wisely

Within NPS, a wide range of investment options is available. Senior citizens who enter this scheme will have to choose wisely.

First, they will have to decide on their equity:debt allocation. The equity:debt mix should be chosen keeping in mind the senior citizen's risk appetite.

Second, multiple fund managers are available. Investors should look at past performance of funds and make the right choice.

With active fund management being allowed now, the divergence in returns between pension fund managers may widen in the future. One point to be remembered here is that at present one has to choose the equity, corporate bond and government bond fund from the same fund manager.

One can't choose the equity fund of one pension manager, corporate bond fund of a second, and government bond fund of a third.

Three, the tier-I account can serve as the senior citizen's retirement account.

The tier-II account allows withdrawal at any time and can, hence, be used by senior citizens to park funds that may be needed in the near future. Since the investment horizon in the tier-II account is likely to be shorter, senior citizens should stick to debt funds here.

6. Implication of annuity option

At the time of taking the money out, at least 40 per cent has to be converted into an annuity. This condition is actually a double-edged sword because the conditions currently say that the annuity has to be purchased from a life insurance company.

Unfortunately, the returns of annuities are not very attractive. So, this feature is actually a negative factor that the investor must face.

The only saving grace of an annuity is that it protects the investor against longevity risk (the annuity will continue to make a payout so long as he lives).

Meanwhile, there is talk of removing the compulsory annuitisation requirement. If the government allows this, investors may be able to withdraw money from NPS in the form of a systematic withdrawal plan.

Arnav Pandya is a certified financial planner.