Invest now for future needs

The National Pension Scheme or NPS has been much talked about. The idea behind pension plan is to provide financial security and stability to individuals during the later stages in life. At the juncture when people do not enjoy a regular and steady source of inco-me, it becomes all the more significant to have a pension plan handy. A standard retirement plan serves to ensure that individuals can sustain their life standards without being dependant and without having to compromise on their standard of life during the years post-retirement. A good pension scheme provides a chance to invest as per choice and create savings and later reap the benefits of a lump sum amount in the form of a regular income by means of an annuity plan at retirement.

If a person opens a National Pension System or NPS account, he or she is needed to keep contributing annually to that account. The NPS is viewed as a retirement product that requires you to keep the account locked for the period till you reach the age of 60 years. If you fail to do so, there are possible after-effects of not contributing to the pension account. There are, of course, penalties to begin with. However, first and foremost, let us understand the relevance of NPS as a scheme, the guidelines that need to be followed and the penalty that follows if the contribution is stopped anytime before the lock-in period.

Understanding NPS

The article on the National Pension Scheme on its official website says that NPS was launched, with the prime objective of providing retirement income to all citizens. NPS aims to institute pension reforms and inculcate a habit of saving for retirement among the citizens.

Initially, the NPS was introduced for new government recruits other than those from the armed forces. From May 2009, however, it has been provided to all Indian citizens, inclusive of those working in the unorganised sector on a voluntary basis.

Its important features are:

• Allotting the subscriber a uni-que PRAN or Permanent Retirement Account Number
• Using PRAN for all transactions

• Allowing the scheme holders to use the PRAN from any location in India

The account for tier-1 or the retirement account for NPS is a relatively long-term financial product that requires regular contributions from the person holding it every year and channelises that money in the investment funds of that person’s choice. As of now, there are three different fund options to opt from:  Equity fund (it doesn’t allow you to put more than half of your money in this); corporate bond fund and government securities fund.

Rules to be followed

An amount of Rs 6,000 is set as the least amount that has to be contributed every year. It is possible to deposit this amount at one go and also have the option of doing the same in instalments. However, instalments will prove to be more expensive. Till the age of 60 of the scheme hol-der, this money remains invested. At the age of 60 years, one can withdraw up to

60 per cent of the total collected corpus but one needs to buy an annuity, which is a pension product that pays in the form of a periodic income during one's retirement days, with at least 40 per cent of the corpus.

If the money has to be withdrawn before the age of 60 years, at least 80 per cent of that money is required to be annuitised. However, certain partial withdrawals under the PFRDA Act 2013 are allowed under special circumstances. The notification for this is yet to come.

There is also a tier-II account offered by the NPS that is completely flexible. The only dissimilarity is that it allows withdrawals. A minimum balance of Rs 2,000 every year is required, however.

Fine for missing Rules

If the required Rs 6,000 is not deposited in instances of skipping the payment of that money or payment of a lesser value than that is made, the Pension Fund Regulatory and Develo-pment Authority will be bound to freeze the account. No transactions will be allowed until one pays the bare minimum contribution with a penalty amount of Rs 100 per year of defaulting contributions.
However, even if the account is frozen, the deposited money will remain invested until the fund value does not decrease to zero. The account will be closed and you will have to further reactivate it.
A penalty of Rs 100 has to be paid, even in the case of the tier-II account in case the yearly contribution is skipped or the minimum balance of Rs 2,000 is not maintained.

Adhil Shetty is CEO of BankBazaar.com