The story so far: Started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension System (NPS) has been open for individuals from all walks of life to participate and build a retirement nest-egg.

• Given the dominance of informal employment in India, the Employees’ Provident Fund Organisation, which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce.

What overhaul is the PFRDA planning?

• The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement.
• With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise.
• Members who accumulate up to ₹2 lakh in their NPS account at the time of retirement are exempted from the mandatory annuitisation, and can withdraw the full amount.

What prompted this rethink?

• Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause.
• “If someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee once the person dies, the rates are varying between 5% and 5.5%.
• Since annuities are taxable, deducting the tax and factoring in the inflation means annuities are yielding negative returns.
• To avoid forcing people into such an unattractive investment, the regulator has now proposed to give members a choice to retain 40% of their corpus with the NPS fund managers even after retirement.
• This, will allow them to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds.
• While this change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ₹2 lakh to ₹5 lakh is being done immediately.

About National Pension System (NPS) scheme

• It is a pension cum investment scheme launched by Government of India to provide old age security to Citizens of India.
• It brings an attractive long term saving avenue to effectively plan retirement through safe and regulated market-based return.
• The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA).
• National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
• Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years (as on the date of submission of NPS application) can join NPS.
• An NRI can open an NPS account.
• Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time.
• Opening multiple NPS accounts for an individual is not allowed under However an Individual can have one account in NPS and another account in Atal Pension Yojna.

https://www.thehindu.com/business/Economy/the-hindu-explains-why-is-the-government-tweaking-the-national-pension-system/article34403886.ece

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