The National Pension Scheme (NPS) has made several changes in its various operational parameters in recent times, but there is one significant change that needs attention of all investors. This relates to the manner in which withdrawals can be made from the scheme once the pension age has been reached. The new norms will make it easier for individuals to actually ensure that they are able to get the required amount of money in the manner in which they see fit rather than being forced to follow the conditions laid out in the scheme. Here is a look at the change that will now be visible.
Current situation: There are two phases in the entire process of pension for individuals. The first stage, which is important for wealth accumulation point of view, deals with investments that will be made in the scheme. This can take place over a number of years and the goal of investors should be to contribute as much as possible so that a higher amount is available in the latter years. The other stage comes at the time of reaching the age for receiving pension. When a person turns 60, it is mandatory to use 40 per cent of the accumulated amount to generate pension, while the remaining amount can be withdrawn.
With respect to the remaining 60 per cent of the accumulated amount that is present in the account, investors can choose the phased withdrawal system, whereby, they can choose a certain percentage that they would withdraw each year including the year in which they are exiting the system. This is often found to be a problem for several people who have need for funds at a specific point of time and with the phased withdrawal undertaken, the needs and the flow of fund might not match. This is the reason that there have been lots of representations to the pension authorities regarding this issue.
Change: There has been a change initiated with respect to withdrawals following the representations made on the issue. There will now be an option for subscribers to defer, or time, the entire lumpsum withdrawal as per their convenience. The new system would be called the deferred withdrawal system. Under this system, there is the ability to take the entire 60 per cent of the withdrawal at a single point of time. The other factor is that investors can decide the time period. So, this could be right at the time of reaching the pension age or later. This will help a lot of people who actually need funds at the time of their retirement for a specific purpose and they will be able to take the money to the extent allowed as per the workings of the scheme.
Responsibility: The availability of the route of withdrawal also means an additional bit of work as far as individuals are concerned. Since they have the responsibility of making the required decision on their own, this will require an element of homework on their part. It has to be noted that they can defer the withdrawal only up to a period of 70 years of age and take it at any time before they reach this age. Meanwhile, no new contributions will be possible. If there is no intimation given till the time they reach 70, then the amount would be redeemed at that specific point of time.
Investors now have to make the decision in advance and they have to go about the process by looking ahead and then planning for this particular situation.
(The writer is a CA and certified financial planner)