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Proper and meticulous financial planning is required to ensure one can spend their life after retirement in utmost relief. Today, there are multiple options when it comes to securing finances for post-retirement life. The Government of India also endorses several financial schemes customised for this purpose.

The National Pension Scheme or NPS is one such government-sponsored option that allows individuals to invest and save for life post-retirement. It is also one of the few government schemes that do not have a fixed rate of return. NPS interest rates are market-linked, meaning they fluctuate based on how the market is performing.

What is the National Pension Scheme?

Essentially, NPS is a voluntary pension fund. People can invest in their NPS account from time to time until maturity. The entire scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Government of India.

NPS involves two account types –

  • Tier-I: It is mandatory for all NPS subscribers
  • Tier-II: It is a voluntary account

As mentioned earlier, the National Pension Scheme is a market-linked option. Hence, investments under it are channelled toward assets like equities and debts.

The National Pension Scheme interest rate depends on the performance of those assets in the market. Therefore, the amount one is to receive upon retirement is not predetermined.

How is Income Generated under the National Pension Scheme?

Individuals can make periodical contributions in their NPS accounts until retirement. PRFDA-registered pension fund managers manage these contributions, of which there are eight at present. These include –

  • Reliance Capital Pension Fund Limited
  • HDFC Pension Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • UTI Retirement Solutions Limited
  • Birla Sun Life Pension Management Limited
  • ICICI Prudential Pension Funds Management Company Limited
  • SBI Pension Funds Private Limited
  • LIC Pension Fund Limited

The invested amount, or principal, accrues returns throughout the tenure based on the invested assets’ performances. Historically speaking, NPS interest rates have varied between 8% – 10%.

After retirement, individuals can withdraw a portion of the accumulated amount in a lump sum, which is capped at 60%. The rest of such amounts are used to invest in an annuity plan. Thereby, the beneficiary will receive a fixed monthly pension.

How Asset Allocation Takes Place under the National Pension Scheme?

Asset allocation is one of the primary factors that influence NPS interest rates. NPS involves four types of asset classes. The following table illustrates these types.

Asset ClassAsset Type
Class GGovernment Bonds
Class EEquities
Class CCorporate Bonds
Class AReal Estate Investment Trusts (REITs), Commercial mortgage-backed securities, and alternative investment funds.

Individuals can choose any of the two investment choices under the National Pension Scheme –

  • Active choice

By opting for active choice, individuals can decide how their funds will be allocated across different asset classes. However, the maximum percentage one can choose to invest in asset class E, i.e. equities is capped at 75% until one attains 50 years of age.

After reaching 51 years, the maximum percentage one can invest in equities decreases gradually, per predetermined rates.

This is mentioned in the table below.

AgeMaximum allocation to equity
60 years50%
59 years52.5%
58 years55%
57 years57.5%
56 years60%
55 years62.5%
54 years65%
53 years67.5%
52 years70%
51 years72.5%

Aside from this, individuals can choose to commit a maximum of 5% of their total funds to Alternative Investment Funds (AIFs). Other asset classes do not invite any restriction in this regard.

Individuals looking for a high National Pension Scheme rate of interest shall opt for a higher allocation to equities. However, they should also consider the risk potential of such investment and align it with their risk aptitude.

  • Auto choice

In this case, the allocation is based on the lifecycle fund that an individual has chosen. There are three types of lifecycle funds, segregated based on the overall risk quotient. These are –

  • Aggressive
  • Moderate
  • Conservative

Naturally, each fund features varying asset allocations to achieve differing risk factors. One shall note, however, that under auto choice one cannot avail of the option of asset class A.

With all three such funds, the risk factor dilutes more and more based on the investor’s age.

Individuals with low risk-appetite might choose to go with a conservative lifecycle fund. The asset allocation of a conservative lifecycle fund is given below in the table.

AgeAsset Allocation
EGC
Up to 35 years25%30%45%
40 years20%45%35%
45 years15%60%25%
50 years10%75%15%
55 years5%90%5%

Individuals looking for a high NPS interest rate can opt for the aggressive portfolio. The following table demonstrates the asset allocation of an aggressive lifecycle fund.

AgeAsset Allocation
EGC
Up to 35 years75%15%10%
40 years55%30%15%
45 years35%45%20%
50 years20%60%20%
55 years15%75%10%

The asset allocation in a moderate lifecycle fund is mentioned in the following table.

AgeAsset Allocation
EGC
Up to 35 years50%20%30%
40 year40%35%25%
45 years30%50%20%
50 years20%65%15%
55 years10%80%10%

Hence, the NPS interest rate 2020 one can earn by investing in the National Pension Scheme mainly depends on the investment choice and fund type thus selected. Also, individuals can choose to alter their investment choices twice in one financial year for both Tier-I and Tier-II accounts.

Another factor that has some bearing on the rate of return from an NPS account is the fund manager. Different fund managers boast varying rates of return. Individuals can change their fund managers and also opt for different PFMs for Tier-I and Tier-II accounts.

Hence, it is essential to closely track how one’s funds are performing and make due changes to align it with their investment objectives.

Who Should Opt for the National Pension Scheme?

NPS is open to all the citizens of India within the ages of 18 – 60 years. Individuals looking for higher returns on their retirement savings can make use of NPS current interest rate. However, in doing so, individuals should consider their risk appetite and the returns they are expecting. One should further consider their knowledge about the financial markets before opting for either of the two NPS investment choices mentioned above.

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