It has been a while since I talked about NPS. At that time I did not consider NPS to be a good investment choice or an interesting asset class for a few reasons. A few things have changed with NPS and I have become older and perhaps wiser. Did my stance on NPS change now? Time to find out.
Lets start with why I did not consider NPS to be a good investment for me. One of the reasons I did not like NPS was that I was not allowed to withdraw my investments until I am 60 years. Well, there are some exceptions, but I will get to that in a minute. But why at 60? Why not whenever I want to? What if I was diagnosed with a terminal illness before 60 and all the nominees died in an accident? Neither can I use the money, not will there be anyone to enjoy the investment once I am gone. An investment should be flexible to changing conditions and should let me determine when to use it for what purpose. Here I was planning to retire early and if I cannot use a chunk of my money until 60 it does not help in my early retirement planning.
Like I mentioned before, you are allowed to withdraw up to 20% of your investment before the age of 60, under very strict circumstances. It is my money after all, I should have full rights as to when and for what purpose I want to spend it. I don’t like someone else doing financial planning according to their beliefs and rules about my circumstances.
Even if one lives to the age of 60, you are allowed to take only 60% of your corpus. Again a silly restriction. Why not the full amount? The worst part is that I am forced into investing 40% of my NPS corpus into annuity. I have no idea what the annuity rate would be, but more importantly if it will match up with inflation as years pass by. I don’t like annuities for many reasons but that is for another day. The flexibility of a mutual fund is clearly missing in NPS. Even the options for annuity are too many and confusing
- Annuity/ pension payable for life at a uniform rate.
- Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive.
- Annuity for life with return of purchase price on death of the annuitant.
- Annuity payable for life increasing at a simple rate of 3% p.a.
- Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Annuity for life with a provision of 100% of the annuity payable to spouse during his/ her life time on death of annuitant. The purchase price will be returned on the death of last survivor.
Those were the cons of NPS for me. Now for some neutral points. While NPS offers great tax benefits, they are not useful for me since I am not working anymore. NPS offers tax-free lumpsum payout of 60% of corpus when you take out the money after attaining 60 years of age. Which might be good news for some, but for me, it does not matter since all my income (for expenses) from my mutual fund investments is below tax slab anyway. Why to complicate my finances with NPS? Finally some may find the auto asset allocation based on risk to be useful. Again for me it is a neutral thing. I prefer to do my own asset allocation and manage it.
The only positive side I see for NPS is the low fees. I wish I could have it, but it is alright. Not a big enough benefit for me to invest in NPS. The direct fund expense ratio is not that far from it and the alpha generated should hopefully compensate.
Having said that, NPS is certainly a good investment for some, just not me. I like to be in control of my investments and I have a plan. NPS is particularly useful if some one who does not know how to make a financial plan for retirement. It has excellent tax benefits and good returns. NPS might be useful for people who want to retire at the normal age, especially since you get extra Rs. 50K tax deductions. As for me, my stance remains the same :). It is probably good for some, but not for everyone, especially for those wanting to retire early and certainly not for me who likes to have more control over where to invest and when.