For many, working hard, saving a lot and retiring happy is a dream becoming less achievable. Rising inflation, slow economic growth and banks mis-selling financial products add to retiree woes.
While the government pension net is absent for employees in the private sector, there are few pension products available that can realistically see one through retirement. Also, traditionally safe investments aren’t offering the meaningful yields they used to.
In light of this, the recent clarification of the Pension Fund Regulatory and Development Authority (PFRDA) to include non-resident Indians (NRIs) in the National Pension Scheme (NPS) is a much-needed breather, providing a new investment vehicle that is expected to benefit more than ten million NRIs.
Eligibility
In the UAE, Indian workers with an Emigration Clearance Required stamp in their passports are currently only eligible for pension cover under the Mahatma Gandhi Pravasi Suraksha Yojana (MGPSY) programme.
“One of the unique features of the NPS is that it allows those who return to India before their retirement to partially withdraw a lump sum, which can be a big help,” says K.V. Shamsudheen, Chairman of the Pravasi Bandhu Welfare Trust in Dubai. “Also, unlike MGPSY, this scheme is available for all income segments.”
For the low-salaried and blue-collar workers, the NPS will ensure that the investor cannot withdraw funds before a fixed number of years and hence manage to accumulate a decent amount.
“It is a transparent and cost-effective system, and the subscriber will be able to know the value of the investment on a day-to-day basis,” says T.R. Remesh, President of the Overseas Friends of Bharatiya Janata Party.
Hemant Contractor, PFRDA Chairman, says, “The NPS is an attractive option for NRIs, especially those in the Middle East.”
While the pension plans of life insurance companies, mutual funds and the 15-year Public Provident Fund are at one’s disposal, flippant fund management guidelines and an underdeveloped debt market invariably take a toll on returns.
Again, pension and retirement plans by HDFC, Birla Sun Life and Reliance have delivered 11-12 per cent returns over the past ten years, and help accumulate a sufficient nest egg, but the long-term capital gains from these funds are taxable, and will not provide you with a regular income after retirement.
In such a scenario, the NPS is a safe investment scheme for NRIs, with a minimum annual contribution of Rs6,000 (about Dh330) and income tax deduction for an investment of Rs100,000.
Portability and flexibility notwithstanding, the NPS, which promises transparent investment norms, regular monitoring and performance review of fund managers, is fraught by the fact that while contributions are fixed at the beginning, there is no guarantee of returns.
According to personal finance service Investment Yogi, “The NPS has delivered annual returns of around 10 per cent in the past four years. The fact that NPS fund managers can also take exposure to equity and [its] related instruments is also a positive for the scheme in the long run.”
Deep impact
Experts say the NPS will not change the retirement investment landscape dramatically in the short term since the scheme will not be pushed by agents and people’s awareness is likely to be low. However, the scheme will eventually have a far-reaching impact as it provides a retirement option to the self-employed and both high- and low-skilled workers, with small obligations.
Insiders also believe the NPS will increasingly become a benchmark for other pension schemes, as investors will demand portability, flexibility and lower costs, aside from performance.
If wide-ranging pension reform comes into effect, some expect all pension schemes to fall under the PFRDA. And that will be the most enduring contribution of the NPS.
