NPS subscribers can now choose preferred fund managers for 3 asset classes

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Those who have subscribed to the National Pension Scheme (NPS) can now choose separate pension managers for three asset classes—equity, government security, and corporate bonds. Earlier,  subscribers could choose only one pension manager for all the asset classes.

National Pension Scheme (NPS) India is a voluntary and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement.

Investors under the old tax regime get a tax benefit of up to Rs 1.5 lakh under Section 80C and an additional exclusive benefit of up to Rs 50,000 under Section 80CCD (1B).

Point to note: This facility of selection of multiple pension funds has been capped at three funds.The option, however, has not been extended to alternative assets.  Subscribers can change asset allocation four times in a financial year. This new facility of expanded choice for NPS subscribers to be available in the corporate sector as well as all citizen model categories

The ten pension funds in the country currently include seven private pension managers—Axis Pension Fund, Aditya Birla Sun Life Pension, HDFC Pension, ICICI Prudential Pension, Kotak Mahindra Pension, Max Life Pension, and Tata Pension Management. The three government-owned pension managers are LIC Pension, UTI Pension and SBI Pension Management.

PFRDA has also laid out some conditions to avail the new facility. Such as-

1. To use this facility, subscribers will have to opt for active choice for asset allocation and not auto mode. Active choice allows investors to decide their allocation to various asset classes and is most suited for risk-tolerant individuals who are comfortable with market volatility, as it enables them to allocate a larger portion of their contributions to equity assets. The auto-choice option allows investors to choose from one of three life-cycle funds.

“The Auto choice allocates between equity and fixed income automatically, depending on the age of the investor. It is further subdivided into Aggressive Life Cycle Fund (LC75), Moderate Life Cycle Fund (LC50) and Conservative Life Cycle Fund (LC25), with the maximum equity allocation being 75, 50 and 25 per cent, respectively, up to the age of 35. Thereafter, the equity allocation reduces every year. On the other hand, the active choice gives the flexibility to the investor to decide the allocation between equity and fixed income. Investors up to the age of 50 can allocate a maximum of 75 per cent to equity,” explained Aakar Rastogi of Value Research.

2.This facility will not be available in alternate asset classes, only in equity, government security and corporate bond assets.

3. This facility will be available only in the existing All Citizen Model (Tier-I), NPS corporate model (Tier-I) and Tier-II (All subscribers) categories. That is, government employees having Tier-1 NPS account cannot avail this facility, they will get the benefit only if they have Tier-2 account.

4. New investors joining the scheme will be able to avail the facility of choosing multiple pension fund managers only after three months of registration.

The assets under management (AUM) of the National Pension System and Atal Pension Yojana (APY) crossed the Rs 10.5-lakh crore-mark in November 2023.

Investors get flexibility

“This facility is a good initiative for subscribers as it will provide flexibility from an investment perspective. This will also keep pension fund managers on their toes to keep delivering top-quartile fund performance so subscribers can continue to choose them,” said Sumit Shukla, Axis Pension Fund.

Look for consistency

As Business Standard noted earlier, ” When choosing a PFM, use long-term performance data to weed out underperformers. Thereafter, if you are left with a group whose returns vary within a narrow band, select a PFM belonging to a group well known within the fund management business, who you believe will still be around 50-70 years hence. Look for a consistent performer across asset classes.

Move will promote competition among pension fund managers

“NPS is a long-term investment product. Even a small improvement in fund performance can significantly impact subscribers’ retirement plans. Choosing multiple fund managers is beneficial for well-informed investors who can actively research and make informed decisions. It will promote competition among fund managers as their performance will be closely scrutinised. However, fund managers’ past performance does not accurately indicate their future performance. Thus, those without sufficient knowledge should avoid churning fund managers,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

Earlier this month, the pension regulator also gave the green light for NPS subscribers to withdraw up to 60 per cent of their pension corpus through the systematic lump sum withdrawal (SLW) facility. Subscribers can choose to undertake phased withdrawals on a monthly, quarterly, half-yearly, or annual basis, all the way up to the age of 75.

“Presently, NPS subscribers could withdraw 60 per cent of their total corpus only as a lump sum after turning 60, with the remaining 40 per cent directed towards purchasing an annuity. However, the PFRDA’s latest changes empower subscribers to initiate withdrawals in a phased manner at the age of 60 while the annuity purchase can be deferred until they reach 75. This great initiative ensures that subscribers don’t have to withdraw the entire 60 per cent of their tax-free proceeds all at once. Instead, they can opt for staggered withdrawals over a desired period,” said Chirag Madia of Value Research.

Moreover, NPS offers automatic annual portfolio rebalancing, which does not attract any capital gains tax, which one might have to incur otherwise if they maintain a separate debt or equity portfolio, noted Madia.

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Pooja Gupta

CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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