Key features & Benefit of Investing in the National Pension Scheme

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The need for a secure retirement has been understood better in the 21st century more than ever. While there are several pension funds plans offered today by private corporates, it is the National Pension Scheme (NPS) which always stands out. The NPS was born in 2004. The primary goal was, to provide individuals with a source of income even after retirement. The main reason was that, several expenditures occur in one’s old age. 

These included children’s education, marriage, etc. This is where the NPS helps a lot. In the NPS, an employee contributes an amount (mostly deducted from his/her salary) on a regular basis till retirement.  Then he/she receives it as pension in old age in the form of monthly instalments.

NPS Account creation methods

The PFRDA (Pension Fund Regulatory and Development Authority of India) decides on all matters concerning the NPS. It allows users to use both offline as well as online modes to open an account: 

Offline Mode: In order to physically sign up (i.e. in an offline mode), the user must go to a nearby Point of Presence (PoP). It is here that one collects a subscriber form and submits it along with all necessary KYC documents. Once you make the initial investment, the PoP will send you a PRAN (Permanent Retirement Account Number). This number and password in your packed welcome kit at the cost of a one-time fees of Rs 125 would help you use your account. 

Online Mode: Considering that now, almost everything is available at the end of our screens even the NPS can be created online. The basic requirement is that your account must be linked with your Aadhar, PAN Card and mobile number, to create it digitally. Once it is, you can generate a One-time Password (OTP) and thus create your PRAN. 

NPS Returns Calculator

The ability to estimate returns is always an added incentive. Just like to compare the options with highest fd interest rates, we have the Bajaj Finance Online calculator, for the NPS too we have an option. Even the NPS can be calculated using an online calculator. This calculator requires you to input the following fields: 

  • Present Age
  • Retirement Age
  • Contribution towards NPS per month
  • Expected rate of return on NPS Investment
  • Annuity Period
  • % Of pension wealth invested as annuity
  • Expected rate of return on annuities

The NPS calculator will generate the lump sum figures you will receive at the time of maturity, as well as the monthly pension amounts. The latter would of course depend on what your expected rate of return is. 

Here is an example to help you understand how the NPS calculator computes your monthly pension.

Mr Harish is a 25-year-old private sector employee. He subscribes for the National Pension Scheme and decides to contribute Rs 7000 every month towards the scheme. NPS matures when the subscriber turns 60 years of age. Meaning, Mr. Harish will able to contribute for the next 35 years towards the scheme and expects a return on investment (ROI) of 8% per annum. In the same line, he would like to purchase an annuity for 40% and expect a 6% rate of return on the annuity.

The status of Mr Harish’s pension account at retirement as generated by the NPS calculator will be as follows:

Total corpus generated: Rs 1,61,64,226

Annuity Purchased: Rs 64,65,691

Lump sum value withdrawable on maturity: Rs 96,98,535

Expected monthly pension: Rs 32,329

As seen in the above example, with a minimal subscription of Rs 7000 a corpus of several lakhs was generated. In fact, a post-retirement pension payment (sort of salary) of more than Rs 30,000 could be generated. Considering the NPS could provide relatively high returns on investments of even Rs 500 or Rs 1000 per month, makes them very attractive. They can be used by anyone and hence are indeed one of the most widely usable options with great returns.