Despite making 40% withdrawal at the time of retirement tax free in the recent Budget, there is no reduction in investors’ anger against the National Pension Scheme (NPS). This anger is more among the first batch of retirees, who were forced to buy ‘sub optimal annuities’ and the recent “NPS sucks” article by a senior columnist is the best example of this.
We don’t think that NPS sucks in its entirety. In fact for the ‘accumulation stage’, it is the best product available now. While it is comparable to mutual funds, in terms of parameters like funds management, transparency, NPS offers several other advantages. No mutual fund in India can match the very low expense ratio charged by NPS.
Exclusive tax deduction of Rs 50,000 under section 80CCD is another advantage. More importantly, no other investment products in India allow investors to move between different asset classes and fund managers in the middle without any ‘tax incidence’.
However, NPS definitely sucks when it reaches the ‘withdrawal stage’ and the biggest problem is a Pension Fund Regulatory and Development Authority (PFRDA) rule that force investors to use 40% of the corpus to buy annuities. In other words, the entire advantages generated during ‘low cost accumulation stage’ disappear with this shift to ‘high cost annuity products’. Since the return provided by the annuities in India are much less compared to other products available in the market such as senior citizen savings scheme and tax free bonds, NPS subscribers feel cheated.
