National Pension System (NPS) structure was started by GOI in order to provide financial security and stability during later years when people don’t possess a regular source of income. The subscription to NPS is rising with the lure of additional taxes break but still NPS have not got the traction it was likely to get. That is because of a few of the drawbacks of NPS and some of the doubts of the traders.
In this post we’ll see some of these drawbacks so that investor gets the necessary knowledge and make an informed decision. Below are a few of the drawbacks of NPS. Mind you a few of these may be regarded as drawbacks by investors rather than actually be considered a drawback if seen from a slightly different angle.
- Seek professional financial advice if you are uncertain of any aspects of the investment
- Iron Mountain (IRM) – income of $122.20
- THE ORIGINAL AMERICAN ECONOMY
- Start the enrollment process (Step 2 2)
- ► March 2012 (1)
- Has more than 100 shareholders
Very long duration – In NPS you will need to contribute till age 60. If you’re needs to contribute at the age of 25 that could mean a length of time of 35 years when you make investments profit NPS. While I do admit that exit and incomplete withdrawal rules are a little complex but it’s the long duration of the NPS that will help you build a large corpus. Also don’t forget a few of the amount will equity and it is a well-noted fact that equities pay in an extended term.
You have to view it as a pension plan which should start providing you back only following the age of 60, so long duration ought never to be considered a deterrence. But avoid the fact that the total amount you get monthly from the purchased annuity will also be taxed as per the applicable tax rates.
Mandatory annuity – Another point that is making people not opt for NPS is the mandatory buying of annuity with at least 40% of the corpus. The majority of us want full control of the total amount after trading for so long. Moreover annuity come back rates in India are in the range 5.5 – 7 percent. This means for the quantity of 50 Lakhs in annuity your regular pension should come to about Rs. Partial withdrawal and exit rules – Exit and partial withdrawal rules aren’t very flexible are another reason distributed by investors to stay away from NPS.
If you want to exit before attaining the age of 60, at least 80% of the accumulated corpus should be used for the purchase of the annuity, which means you can only withdraw 20% of the corpus. For incomplete withdrawal you should have been committed to NPS at least for a period of 10 years.
There should also be a gap of at least 5 years between two successive withdrawals. Some relaxation in this difference is given only in the entire case of treatment for a given illness. These rules defer few investors who would like usage of their money within the tenure of the subscription. Investment in collateral – Many investors are conventional and don’t want to purchase equities.
NPS does offer an option through Active choice to put the complete contribution in Government Securities or Corporate Bond Fund. But Active choice means you have to select the asset course and the account manager. Investors find all that research too intimidating and want to choose Auto choice but in Auto choice equity percentage will be there.
To avoid this dilemma people go with other debts options rather than deciding on NPS. At the same time there is another band of investor who wishes to be in control of their investment and want to choose how their contribution is invested. For them 50% cap on collateral allocation even in Active choice is a way to obtain concern.
Now we can see it as a balancing work by NPS (50% cap on collateral) to keep both classes of investors happy. Investors who prefer equity should opt for a few other mutual money too with more exposure to equity. Returns aren’t guaranteed – In NPS returns are market linked. You aren’t given a dark and white that these are your assured profits under NPS. Investors who want to have a clear picture where their money is certainly going and exactly how much they will get after the specific duration think it is a bit risky. This concern is valid in case market accidents in the entire year, you are retiring, which would mean a much smaller corpus than prepared.