NEW DELHI: The National Pension System (NPS), a market-linked scheme, helps you save for retirement. Anyone between the age of 18 and 70 can open an NPS account and start saving till retirement. This means individuals or senior citizens joining at the age of 60 get around only 15 years to stay invested in NPS, as the maximum age allowed at the time of maturity is 75.
However, there are some risks involved with late investment in NPS. Here is a look at them:
NPS investing: Investment options and the pension fund manager remain the same for senior citizens joining after 60.
The normal exit will be after three years, and a senior citizen cannot defer the annuity beyond it. They are allowed to withdraw a maximum of 60% of the corpus at 75. However, the balance of 40% will have to be compulsorily annuitized. It means the subscriber has to purchase pension or annuity from any life insurers using 40% of the NPS corpus after three years once the initial investment is made. Further, if a senior citizen decides to exit before three years, only 20% can be withdrawn as a lump sum, and with the balance of 80% of the corpus, he needs to purchase an annuity plan.
Risks of investing in NPS after 60
It is important to note that saving taxes should not be the sole objective for senior citizens to invest in any tax saving investment, especially NPS.
1. Liquidity risk: The first is the liquidity issue. Adhil Shetty, CEO, BankBazaar.com, said, “NPS has lock-ins not just during the investment period but also after the investment when the investor needs to purchase annuity compulsorily. For senior citizens, the lock-ins may not be convenient.”
2. Returns are not assured: NPS is a market-linked product with contributions exposed to equities, and debt needs time to perform.
“A Senior Citizen Savings Scheme or National Savings Certificate (NSC) investment, for instance, advertise the rate of return clearly. Also, with the annuity requirement, the investor must invest 40% of the NPS corpus in a pension plan that may provide sub-optimal returns and fully-taxable returns comparable to FDs. Therefore, the overall returns from the NPS investment start falling on maturity due to the annuity requirement. In contrast, an alternative – an index fund, for example – could continue providing sustained growth for any length of time,” Shetty said.
3. Lesser investment horizon: NPS can perform better over a longer duration as equities have generally outperformed other asset classes over the long period.
“The NPS investment tenure available to a senior citizen is much shorter compared to, say, a 35-year-old who can get through several market cycles to earn good returns. But a senior citizen will not have that luxury. Currently, the returns from corporate and government debt are very low and likely to remain low. Therefore, an aged investor will not have enough time to remain invested for higher returns. Even if the senior citizen took a 50% exposure to equity, there might not be enough time to enjoy optimal returns due to a short investment tenure,” said Shetty.
4. Taxable pension income: Annuity received as a pension income is taxable in the hands of the senior citizen as per their tax slab in the year of receipt.
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