NPS customer cannot withdraw the entire amount on maturity. At the time of maturity, 40 percent of the total fund will have to be used to buy annuity. This annuity amount will provide regular pension after retirement. The remaining 60 percent lump sum amount can be withdrawn.
After turning 40, the biggest worry is what will happen after retirement? How will the expenses be covered? How and where will the regular income come from? All these questions are also important because after retirement, everyone needs money, whether he is dependent on someone or not. Today we will try to find answers to these questions through the National Pension System i.e. NPS.
NPS is a retirement scheme and in recent years has emerged as an excellent investment instrument. Apart from other asset classes like corporate and government debt, NPS also gives you the option to invest in equities which can give you excellent returns in the long run.
In such a situation, if you are 40 years old and have not yet saved for your retirement, then there is no need to worry at all. With a little planning and regular investment, you can still earn up to Rs 2 lakh every month from NPS. Your returns from NPS will decide how much fund you can deposit. To understand this, you need to know the use of NPS and its rules.
It is necessary to buy 40 percent annuity
At present, NPS customer cannot withdraw the entire amount on maturity. At the time of maturity, 40 percent of the total fund will have to be used to buy annuity. This annuity amount will provide regular pension after retirement. The remaining 60 percent lump sum amount can be withdrawn. However, you also have the option to use a part of this lump sum amount to buy an annuity. Thus, NPS customers can also use 100 percent of the amount to buy annuity.
How to invest in NPS for a pension of Rs 2 lakh every month?
Suppose you have recently turned 40. You have 20 years to deposit the lump sum amount in NPS. If you want to get a pension of Rs 2 lakh per month by investing in NPS, how much do you need to contribute? Let us tell you also.
To get a pension of Rs 2 lakh per month, the total NPS fund at the time of maturity i.e. at the age of 60 years should be Rs 4.02 crore. Out of which 40 percent will have to be used to buy annuity. In such a situation, you will have to spend or invest Rs 1.61 crore to buy annuity. At the age of 60, you will have a lump sum of Rs 2.41 crore. If debt returns are not sufficient for monthly pension, you can invest the tax free lumpsum amount in debt instruments or even with a combination of debt and equity.
Suppose, you get an annual return of 6% each in your lump sum amount and annuity. So you can easily withdraw your income. By investing 40 percent of the total fund in annuity, you will get a pension of Rs 80,398 every month. At 6% return from debt instrument, you will get Rs 1,20,597 per month from lumpsum amount. This means that you will get a total pension of Rs 2,00,995 every month from your investment.
How much will be needed to invest in 20 years?
According to the calculator available on the NPS website (npstrust.org.in/nps-calculator), as soon as you start investing at the age of 40, you will have to invest Rs 52,500 every month in NPS for the next 20 years. On an average you can have an equity exposure of 50 per cent and above, which can give you attractive returns over a long period of 20 years. Assuming 10 per cent returns per annum, the total NPS investment corpus at the time of maturity will grow to Rs 4.02 crore.
NPS returns are decided based on market conditions
The returns from NPS depend on market conditions which may vary from time to time. Whether you are investing in your investment phase or in your lump sum amount. If you are getting better returns in either of the two scenarios, then you can keep the investment amount less.
If you are confident that you will get a high return of 9% in the investment phase, then you will need a fund of only Rs 3.14 crore for a monthly income of Rs 2 lakh. Out of this, lump sum will be Rs 1.88 crore and annuity amount will be Rs 1.26 crore.
Suppose you invest Rs 41,000 in NPS every month. At 10 per cent returns per annum, the fund will be worth Rs 3.14 crore at the time of maturity. For example, if you expect to get 11 per cent returns, you will have to invest only Rs 36,000 every month for a fund of Rs 3.14 crore.
Auto Choice or Active Choice
While investing in NPS, you are given two options, the first is active choice and the second is auto choice. In the Active Choice option, NPS customers can decide the allocation or ratio in which their NPS corpus is divided into equity, corporate debt, government debt and alternative investment funds. Under the Active Choice option, you can invest up to 75 percent of the total amount in equities.
However, after the age of 50, the upper limit of equity allocation starts reducing by 2.5 percent every year. The maximum amount to be invested in equity becomes 72.5 percent at the age of 50 years, 70 percent at the age of 52 years, 67.5 percent at the age of 53 years and 50 percent by the age of 60 years. You can invest maximum 100 percent in government bonds or corporate bonds.
Under the Auto Choice option, three life cycle funds are available to investors – Aggressive Life Cycle Fund, Moderate Life Cycle Fund and Conservative Life Cycle Fund. Your investment allocation under each fund will be done on the basis of pre-decided formula. With each passing year, the risk of equity and corporate debt gradually reduces. You can choose a fund based on your risk appetite. You do not need to actively participate in portfolio rebalancing.
