The logic for investing may be very different for those over 65 years of age
The Pension Fund Regulatory and Development Authority (PFRDA) recently raised the maximum entry age for the National Pension System or NPS from 65 to 70 years.
What has changed?
Following the recent rule change, those aged over 65 and up to 70 years can start investing in the NPS and remain invested until they turn 75. Those who had closed their NPS accounts in the past too are allowed to open a new account as per the revised norms.
While there is no official clarification on this from the PFRDA yet, the new rules imply that existing NPS subscribers too can continue to remain invested until 75 years of age as against the current 70 years.
What are the investment choices and tenure options for those subscribing after 65 years of age?
Like every NPS investor, such investors can choose between auto or active choice for their corpus. The maximum equity exposure allowed under these options will be 15 per cent (auto) and 50 per cent (active) respectively.
For those entering the NPS after the age of 65, a ‘normal exit’ can be made after three years of joining. That is, on such exit, they will have to invest at least 40 per cent (tax-free) of their accumulated corpus in an annuity of one of the approved annuity service providers for a regular pension. The remaining 60 per cent (tax-free) will be paid out to them as lump sum. In case of an accumulated corpus of only up to ₹5 lakh, however, they can withdraw it entirely as lump sum. Alternatively, they can remain invested in the NPS any time until 75 and choose to excercise one of the three deferment options – defer only the lump sum withdrawal or only the annuity or both – if market conditions are not favourable at the time of exit. Once a subscriber opts for deferment, no further contributions can be made to the NPS.
An exit before three years will be treated as a premature exit for those entering the NPS after 65 years of age. At the time of such exit, the subscriber will have to use at least 80 per cent of the corpus for purchasing an annuity. Only the remaining 20 per cent can be withdrawn as lump sum. However, if the accumulated corpus totals only up to ₹2.5 lakh, then the entire amount can be withdrawn even though it is a premature exit.
If you are over 65, should you take the opportunity to invest in the NPS?
Not necessarily. While the lock-in until 60 years of age offers a young, early subscriber into the NPS the discipline to remain invested, the same logic may not apply to someone entering after 65 years of age. The NPS helps you build a corpus through investment in a mix of equity and debt. This can be achieved via investing in mutual fund schemes too. The latter is preferable if you need the flexibility to withdraw your money whenever needed.
On exit after three years, at least 40 per cent of the accumulated NPS corpus must be locked in an annuity for a lifelong pension that will be taxed at your income tax slab rate.
Based on the prevalent low annuity rates, the post-tax return (pension income) does not appear attractive, especially so for those in the higher tax brackets.
Today, many NPS annuity service providers are offering monthly annuity for life to a 66-year-old individual at rates of only 5.33-6.31 per cent per annum under return of purchase price (ROP) plan. The returns are better at 8.41-9.28 per cent per annum if you do not opt for ROP.
With someone entering the NPS today, having to opt for an annuity only a few years from now, it remains to be seen if the annuity returns at that point in time are good enough. Also, the PFRDA seems to be looking for an alternative to the compulsory annuity option. Thus, the product features are still evolving.
Thirdly, while a short lock-in of three years is tempting, it must be remembered that NPS is a market-linked product. NPS funds invest in a mix of equity and debt instruments (the latter of a relatively longer maturity). A shorter period may peg up the risk. Holding for ten years up to 75 years of age may make more sense.
Considering all this, the NPS can only be one of the avenues to park your corpus for your silver years. It is best to diversify beyond it.
What other investment options do those aged over 65 have?
For those interested in exposure to both equity and debt, balanced hybrid funds that invest 40-60 per cent of their assets each in equity and debt can be an option. Those interested purely in debt exposure can consider short-duration funds and corporate bond funds with relatively low average maturity of two years or below. The expense ratios may be higher than those for NPS funds but they are more liquid and SWPs (systematic withdrawal plan) can also be initiated if a regular income is needed.
Those who care utmost for principal safety can consider the 5-year senior citizen savings scheme (SCSS) or the GOI’s 7-year floating rate savings bonds (popularly known as the RBI bonds).
The interest rate on the SCSS is 7.4 per cent per annum, which is paid out every quarter. You can invest only up to ₹15 lakh here. RBI bonds too offer an attractive 7.15 per cent per annum, payable half-yearly. While there is a 7-year lock in, you can get the benefit of rising rates, as the interest rate is pegged to the NSC rate (35 basis points over it) and is reset every half year.