Brief Summary
This video discusses the recent changes to the National Pension System (NPS) that make it a more attractive retirement savings option, potentially rivaling index funds. Key changes include increased equity exposure in Tier 1 accounts, more flexible withdrawal options, and the introduction of diverse investment schemes. These modifications aim to enhance returns and provide greater flexibility for subscribers, ultimately improving the retirement corpus.
- Increased equity exposure in Tier 1 accounts from 75% to 100%.
- More flexible withdrawal options, potentially increasing tax-free withdrawals to 80% after 15 years.
- Introduction of diverse investment schemes tailored to different risk profiles and demographics.
Introduction
The video introduces the significant changes in the National Pension System (NPS) that make it a more attractive option for retirement planning. These changes are positioned as a potential threat to index funds due to enhanced features and tax benefits. The presenter promises a step-by-step explanation of these changes and their impact on retirement savings.
The Change in Equity Exposure in Tier 1
The video highlights a major change in the Tier 1 account of NPS, which previously had a 75% cap on equity investments. Now, subscribers have the option to allocate between 75% and 100% of their investment to equity based on their risk appetite. This increased flexibility allows for potentially higher returns, aligning with individual risk preferences.
The Change in Withdrawal
The video discusses the changes related to withdrawals from the Tier 1 account. Previously, withdrawals were only allowed after the age of 60, with 60% of the corpus being tax-free and 40% required to be reinvested in an annuity. The waiting period has been reduced to 15 years. Additionally, there is a proposal to increase the tax-free withdrawal limit to 80%, which would make NPS an even more attractive alternative to index funds due to the tax savings on withdrawals.
The Change in No. of PRANS
The video explains that previously, subscribers were limited to a single Permanent Retirement Account Number (PRAN) tied to a specific Central Recordkeeping Agency (CRA). Now, subscribers can have multiple PRANs with different CRAs, allowing them to select various portfolios and fund managers. The PAN number will serve as the unique identification number, and subscribers can combine active and auto choices within the same journey.
The Change in the Schemes
The video details the expansion of investment scheme options within NPS. Previously, there was only one equity scheme that matched the index. Now, pension fund houses can offer flexible cap-type schemes similar to mutual funds, allowing for more aggressive risk-taking and potentially higher returns. Fund houses must provide high-risk and moderate-risk options, with a third risk-level option being optional. This allows investors to align their investments with their risk appetite, especially for long-term retirement goals. Pension funds can also launch schemes focused on specific demographics like IT employees, self-employed individuals, gig workers, and corporate employees.
The Change in Expense
The video addresses the increase in the expense ratio, which has been raised to allow charging up to 30 paise. While this may slightly impact SA account holders, it is expected to be offset by the availability of diverse schemes. Subscribers who prefer lower expenses can still opt for schemes with minimal charges, similar to index funds. The increased expense ratio aims to support the management of a wider variety of schemes, potentially leading to better retirement corpus growth.
The Change in Entry & Exit Age
The video mentions that the maximum entry age for NPS has been extended from 70 to 75 years, and the vesting age has been extended to 85 years.
The Proposed change in NPS Vatsalya
The video discusses a proposed change to the NPS Vatsalya scheme, which allows opening NPS accounts in the name of a child. Previously, withdrawals were only allowed after the child turned 60. Now, a withdrawal option is being added at 18 years of age, providing more flexibility.
The Schemes of NPS & Its Performance
The video transitions to showing the performance of NPS schemes, with Tier One category delivering an average return of 19.5% over the last five years and a CAGR of 13.63% over the last 10 years. The presenter offers an excel sheet with detailed calculations and performance data of various funds.
The Increase in End Corpus with The Changes
The video provides a comparative analysis of the old and new NPS rules, illustrating the potential increase in the retirement corpus. It notes that the changes are not applicable to government employees' NPS accounts. Using an example of a 25-year-old investing ₹10,000 monthly with a 7% annual increase until age 60, the presenter calculates that under the old rules (75% equity), the end corpus would be approximately Rs. 7 crore 747,000. With the new rules (100% equity), the corpus could grow to 10 crores 43 lakhs 43,000, resulting in an additional corpus of 3 crores 35 lakhs 95,000, or a 47.49% increase.
