The Role of NPS in Retirement Planning: Building Your Pension Corpus

Almost everyone longs for a happy retirement life with financial strength and peace of mind. However, fulfilling this desire becomes challenging when income sources are seized. That is why retirement planning with the right investment options is crucial. Although multiple retirement plans are available in India, the National Pension System is one of the most sought-after options. The following sections will discuss the role of NPS in retirement planning and managing the golden years.

An Overview of the National Pension System

NPS, or the National Pension System, is a retirement savings plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The Indian government introduced this scheme to help citizens effectively plan and ensure financial stability during their golden years. 

While subscribers continue investing in the scheme during their working years, the benefits come when they reach retirement age. They can withdraw 60% of the accumulated savings at maturity and purchase an annuity with the remaining 40%. They receive a regular income stream based on their performance to ensure a secure and comfortable retirement.

How Does the NPS Help Investors Build a Pension Corpus?

Here is how the NPS helps investors build a pension corpus and secure their retirement:

• Ample Returns: Upon maturity, subscribers invest 40% of the accumulated corpus in equities. Although they do not offer guaranteed returns, they are much higher than other retirement planning schemes like PPF and fixed deposits. Over the last few years, it has delivered 9-12% annual returns. Moreover, subscribers can change their fund manager if they are unhappy with the fund’s performance.
• Risk Assessment: The PFRDA has capped equity exposure in the NPS scheme up to 50-75%. It is 50% for government employees. After 50 years of age, the equity portion starts reducing by 2.5% per year. For investors above 60, the cap is set at 50%. The strategy stabilises the equation of risk and returns in the investors’ interest, ensuring corpus safety against volatility in the equity market.
• Regulated: The PFRDA regulates the National Pension System with regular performance reviews, transparent investment conditions, and fund monitoring by the NPS Trust. The fund managers invest the savings in different asset classes. Professional fund management reduces the investors’ risk levels and increases potential returns. People can maximise their corpus by entrusting their money to experienced investment managers. It allows investors to stay confident of their fund growth and ensure wealth security. 
• Flexibility: NPS investments are flexible. That means subscribers can contribute to their NPS account anytime during a financial year. Moreover, they can change the amount and frequency of investments according to their economic capacity based on their goals and risk appetite. They can choose their investment options and operate their NPS account online even when they change their job or city.
• Tax Benefits: The NPS subscribers can save more by claiming tax benefits available with the NPS scheme. Tax benefits of up to Rs. 1.5 Lakh are available under Sections 80 CCD (1) and 80 CCD (1B) of the Income Tax Act. These deductions help increase savings and reduce tax obligations. Thus, NPS is a great scheme to secure a financial future and enjoy tax benefits.
• Retirement Planning: The NPS scheme supports retirement planning by securing the subscriber’s financial future. It is an effective approach to retirement planning. Regular NPS contributions help create a significant corpus and ensure economic stability after retirement. 
• Annuity Options: Annuity benefits are excellent options for people investing in the NPS scheme. Investors can use 40% of their accumulated corpus to purchase life annuities from companies empanelled for PFRDA. Based on the fund’s performance, they can receive a steady income stream after retirement. 

Tips to Maximise Corpus with the NPS Scheme

Here are a few tips to build maximum corpus with the NPS scheme:

• Choose the Right NPS Account Type: There are types of NPS accounts: Tier I and Tier II. While Tier-I is the compulsory account meant for building retirement funds and saving tax, the Tier-II account offers more flexibility for withdrawals. Understanding the difference and choosing the right account type suitable to the requirements is essential. 
• Stay Invested for a Long Term: NPS is a long-term retirement plan. So, a long-term commitment is necessary to reap its maximum benefits through compounding. The longer the investment horizon, the bigger the corpus.
• Use an NPS Calculator: An NPS calculator helps calculate the monthly amount to invest according to the desired corpus. One must use this tool to plan the investment most suitable for retirement goals.

An individual’s retirement age depends on how well they plan for it. Investment in the National Pension System provides several advantages, such as retirement planning, professional fund management, tax benefits, and annuity options. Moreover, it is a government-backed scheme that ensures financial security post-retirement, making it one of India’s most sought-after retirement plans.