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National Pension Scheme: This month the National Pension System (NPS) has completed 15 years of its establishment. NPS was first launched in 2004 for government employees. In 2009, its doors were opened to the rest. NPS allows customers to allocate their investments across multiple asset classes. How has the performance of this scheme been, what are its special features, how can one take advantage of it? Let us try to know the answers to these questions.
Two primary accounts in NPS
There are two primary accounts in NPS. First Tier-1 and second Tier-2. Tier 1 is a pension account, while Tier 2 is a voluntary savings account. PFRDA is the regulator of this scheme. Some time ago, Kurian Jose, CEO of Tata Pension Management, had told about the benefits of NPS in terms of long-term retirement planning.
Benefits of compounding in the long run
He had said that in NPS, subscribers get the benefit of compounding for a long time. Subscribers' contributions grow over time and give great returns in the long run. Jose explained it with an example. He said that suppose a 30 year old person invests Rs 5000 every month in NPS. Under balanced allocation, 50 percent of their money goes into stocks and 50 percent into government and corporate bonds.
Calculation of monthly pension of Rs 1 lakh
If an annual increase of 6 percent in this contribution is assumed and 10 percent return on investment is assumed, then by the time the investor turns 60, a fund of about Rs 1.85 crore is prepared. If 100 percent annuity is selected, the individual will receive a monthly pension of Rs 1,05,292 for the lifetime. If the subscriber dies, the pension will continue to his/her spouse. The nominee will receive the principal amount.
Calculation of monthly pension of Rs 50,000
If a person wants a pension of Rs 50,000 every month after retirement, then its calculation can be adjusted accordingly. If a person invests Rs 2,500 every month in NPS when he turns 30, his total corpus will increase to Rs 92.5 lakh. With this, he will get a pension of about Rs 50,000 every month.
You can contribute every month according to your capacity.
An individual can calculate his corpus in NPS as per his age and monthly contribution. For example, if a person is 40 years old and starts investing in NPS with Rs 5000 every month and increases his annual contribution by 20% every year, his total corpus will increase to around Rs 2 crore. According to 6.5 percent annuity rate, he will get a pension of about Rs 1,13,730 every month.