National Pension System (NPS) system was started by GOI to be able to provide financial security and balance during later years when people don’t possess a regular income source. The subscription to NPS is rising with the lure of additional taxes break but nonetheless NPS has not got the grip it was likely to get. That is because of some of the drawbacks of NPS plus some of the concerns of the investors.
In this post we’ll see a few of these drawbacks so that investor gets the necessary knowledge and make the best decision. Here are some of the drawbacks of NPS. Mind you some of these may be perceived as drawbacks by investors rather than actually be considered a drawback if seen from a slightly different angle.
- Seek professional financial advice if you are unsure of any areas of the investment
- Iron Mountain (IRM) – income of $122.20
- THE ORIGINAL AMERICAN ECONOMY
- Start the enrollment process (Step two 2)
- ► March 2012 (1)
- Has more than 100 shareholders
Very long duration – In NPS you will need to contribute till age 60. If you’re needs to contribute at age 25 that would mean a duration of 35 years where you make investments money in NPS. While I really do admit that exit and partial withdrawal rules are a little complex but it’s the long length of time of the NPS that will help you to build a large corpus. Also don’t forget a few of the amount will equity which is a well documented reality that equities pay in an extended term.
You have to see it as a pension plan which should start giving you back only after the age of 60, such a long time length of time should not be a deterrence. But avoid the fact that the amount you get monthly from the purchased annuity will also be taxed as per the applicable tax rates.
Mandatory annuity – Another point that is making people not choose for NPS is the mandatory buying of annuity with at least 40% of the corpus. The majority of us want full control of the amount after trading for so long. Moreover annuity return rate in India are in the number 5.5 – 7 percent. Which means for the amount of 50 Lakhs in annuity your regular monthly pension should come to about Rs. Partial withdrawal and exit rules – Exit and partial withdrawal rules are not very flexible are another reason given by investors to stay from NPS.
If you want to exit before achieving the age of 60, at least 80% of the gathered corpus should be used for purchase of the annuity therefore you can only withdraw 20% of the corpus. For partial withdrawal you would have been invested in NPS at least for a period of a decade.
There also needs to be a space of at least 5 years between two successive withdrawals. Some relaxation in this space is given only in the case of treatment for given illness. These rules put off few investors who want access to their money with in the tenure of subscription. Investment in equity – Many investors are conventional and don’t want to purchase equities.
NPS does provide an option through Active choice to put the complete contribution in Government Securities or Corporate Bond Fund. But Active choice means you have to decide on the asset class and the fund manager. Investors find all that research too intimidating and want to choose Auto choice however in Auto choice collateral percentage will be there.
To avoid this problem people go with other debts options rather than deciding on NPS. At exactly the same time there is certainly another band of investor who want to maintain control of their investment and want to decide how their contribution is invested. On their behalf 50% cap on equity allocation even in Active choice is a way to obtain concern.
Now we can easily see it as a balancing act by NPS (50% cover on collateral) to keep both classes of traders happy. Investors who prefer equity should opt for some other mutual funds too with an increase of exposure to equity. Returns aren’t assured – In NPS earnings are market connected. You aren’t given n black and white these are your assured results under NPS. Investors who wish to have a clear picture where their money is going and how much they will get after the specific duration find it a little risky. This concern is valid in the event market crashes in the year you are retiring which means a much smaller corpus than prepared.