Planning for retirement requires careful consideration and strategic investment to ensure a comfortable post-work life. Recently, the Pension Fund Regulatory and Development Authority (PFRDA) introduced new rules for individuals withdrawing from the National Pension Scheme (NPS), offering a promising avenue for better retirement planning.
Retirement is indeed a wonderful phase if one has two essentials: enough to live on and meaningful pursuits. While recent surveys indicate a positive trend with more people actively planning for retirement, the challenge lies in the fact that many investments for the retirement corpus are inclined towards fixed income and annuities, which may not effectively combat inflation. This often leads to a shortfall in the first essential – having enough to live on.
To build a substantial retirement corpus, individuals must consider higher equity exposure. Although equity exposure can be gained through stocks and mutual funds, many investors struggle with deciding where to invest and maintaining that investment until retirement.
An alternative worth considering is the National Pension Scheme (NPS), which remains locked in until the age of 60. The only decisions required from investors are related to the allocation between equity and debt and the choice of a pension fund manager. Given that most other retirement investments are in debt instruments, the active equity option in NPS becomes a recommended choice.
Under the previous rules, the NPS corpus could be withdrawn at 60 years, with 40% directed towards an annuity and 60% available as a tax-free lump sum. However, subscribers faced challenges in redeploying the lump sum and dealing with the tax implications on returns from various regular options.
The recently amended withdrawal rules on NPS address these challenges effectively. According to the proposed rule, subscribers can now withdraw the 60% corpus through a systematic lump sum withdrawal plan (SLW) on a monthly, quarterly, half-yearly, or annual basis until the age of 75, as selected at the time of retirement. Importantly, these withdrawals will be tax-free, and the remaining corpus will continue to earn returns, also tax-free.
These new rules position the NPS as a standout retirement scheme in India. Many individuals tend to invest for retirement without seeking formal financial advice, often in an ad hoc manner.
The NPS offers a unique opportunity for investors to participate in equity without the burden of deciding what to buy or when to rebalance. The lock-in feature ensures stability and prevents unnecessary churning, allowing investments to compound over time.
After retirement, subscribers receive regular returns through the annuity portion, which can be supplemented with the SLW as needed.
Meanwhile, the remaining portion continues to earn tax-free market-linked returns. With the removal of concerns about redeployment and taxes, the NPS simplifies both pre and post-retirement planning, making the entire process hassle-free for investors.
