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Personal Finance Blog India –

Drawbacks Of New Pension System NPS:


Since 2009,New Pension System – NPS is available for all individuals to invest.Earlier it was available for Govt employees only.

Though this scheme was revamped recently,it still carries basic drawback & we will focus on the same through this post.

We will consider only Tier-I account for the purpose.

  • Passive Equity fund: Equity scheme of NPS acts as passive fund and replicates BSE or NIFTY stocks.So there is no scope for active fund management.
  • Charges :charges applicable for NPS subscribers are as follows:
  • Nature of service Charges deducted Charge frequency Mode of deduction
    Initial subscriber registration charges by POP – Point Of Presence

     

     

    Rs.100 One time From initial subscription.
    Contribution processing charges by POP. 0.25% of contribution subject to min Rs.20 & max

     Rs.25, 000.

    From each contribution. Through contribution amount.
    Non-financial transaction processing Rs.20 For each request. To be paid upfront for each request.
    Permanent retirement account opening charges by CRA. Rs.50 One time Through cancellation of units.
    Permanent retirement account maintenance charges by CRA. Rs. 190 Per annum Through cancellation of units.
    Transaction processing charges by CRA. Rs.4 On each transaction Through cancellation of units.
    Fund management charges Capped at 0.01% of AUM. On AUM Through NAV deduction –means NAV declared carries this charge.
    Custodian charges 0.0075% for electronic segment & 0.05% for physical segment. On AUM Through NAV deduction –means NAV declared carries this charge.
    NPS charges – Subject to changes made by PFRDA

     

     

  • Purchase / redemption / Non-financial processes need to be more efficient for NPS. NPS investor can not guarantee same day NAV for purchase.Also,there is need of more clarity for withdrawal process.
  • Defaulting Year: Similar to PPF account,investor of NPS account will be fined for defaulting any year.Current default charges are Rs.100/- per year.Investor need to revive the account paying the fine alongwith minimum yearly contribution.
  • Withdrawal:If investor is looking to withdraw before completion of 60 years age,he need to buy annuity for at least 80% of the fund value.After completion of 60 years he /she need to purchase annuity for at least 40% of the accumulated fund value from annuity providers registered with IRDA. Annuity rates  are fixed for life but are quite low.So withdrawal is the biggest limitation of NPS.As basic purpose of NPS is pension,there is little flexibility for maturity amount.
  •  Taxation: Taxation laws are not much favorable for pension schemes.Withdrawals and pension received is taxable.

with comparison of mutual funds,major drawback of NPS includes

  1. Active vs.passive fund management.
  2. Efficient taxation structure for equity mutual funds.
  3. Mutual funds have more efficient processes.

But remember despite the drawbacks,low liquid plans like NPS have their own advantages.Provisions of NPS can keep the investors more active than mutual funds. So investors can think to contribute in  NPS along with mutual funds and can diversify the portfolio.

 


Category: Fixed Income

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Information provided on this blog is for general purpose only & not investment advice.Please take advice of SEBI Registered Investment Advisors before taking any investment decision.
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