National Pension Scheme is a way you can regularly invest while building a healthy retirement corpus. It is one of the easier ways even the most sceptical investor can enjoy the benefits of stock market returns without actively investing in equity.
In the bid to improve investor experience and provide more flexibility to NPS holders, the Pension Fund and Regulatory Development Authority (PFRDA) has initiated a discussion with insurance regulator IRDA on the possible porting of annuities.
Let’s check out the details and see how the new proposed rule will simplify investing in NPS.
What’s the new proposed change in NPS?
Porting the NPS policy between service providers is allowed only at the fund accumulation stage. Now, regulators want to extend it to the annuity stage.
Per the current policy, on the maturity of the NPS policy, subscribers must choose their annuity plan/ pension plan. As an NPS subscriber, you can change the annuity plan in the initial cooling-off period, which usually ranges between 15 to 20 days.
Once the cooling-off period is over, the policyholder cannot change the annuity plan again and must be satisfied with whatever is selected.
In the proposed change by PFRDA, which is at the very initial stage of discussion, the policyholder can switch their pension plan with another NPS provider on an ongoing basis.
Why is the change being proposed in NPS?
Currently, 14 life insurance companies offer to invest in NPS, and 10 life insurance companies provide annuity services. The rate of return life insurers offers is between 5.39 to 6.8%.
The general idea is that while choosing the NPS pension plan, many policyholders decide in a hurry without comparing the returns of different strategies. And, once the cooling period is over and the policyholder develops a better understanding of the product, it’s too late for them to switch.
Therefore, to give policyholders a fair chance to revisit their investment decision and get maximum yield on investment, the government proposed a change in the NPS pension policy.
How will the proposed NPS rule benefit investors?
If the proposed porting of annuities in the NPS policy gets regulatory approval, it will mark a massive step towards making NPS investor friendly.
The following are the benefits.
Better returns from investment:
With the added flexibility to switch between different annuity service providers, NPS subscribers can check which is better and compare returns of varying annuity plans before making informed decisions.
For example, a percentage point difference in return on Rs 20 lakh capital results in a variation of Rs 20,000 in actual returns annually. Furthermore, NPS porting will help subscribers not feel unequal and get the desired benefits of the NPS scheme.
Will help in better allocation of superannuation funds:
Per the NPS policy plan, subscribers must invest 40% of the accumulated NPS corpus/superannuation fund at maturity.
Therefore, many NPS subscribers tend to invest a minimum of 40% to save themselves from the uncertainty of lower returns compared to other annuity service providers in the future. With NPS porting facility, it will help NPS subscribers to increase the percentage allocation of accumulated corpus towards annuity plans and ensure guaranteed income for life.
Insurers will offer better facilities to NPS subscribers:
If the regulator allows the proposed NPS porting, it will increase competition among life insurers, resulting in better facilities and services for subscribers.
For instance, additional benefits like annual bonuses, access to other products at a discounted price or matching the highest return other annuity service providers may give.
Since the NPS porting proposal is at the initial stage of discussion and there is no timeline for its approval, it would not be easy to discuss the actual benefits. As a result, the final structure may differ and can also come with certain caveats.
However, the above points are the broad benefits NPS subscribers will get from the NPS porting facility. Investing in NPS will become user-friendly and attractive for investors, making the sector competitive and helping in better value discovery.
Will the policy change gets the regulator’s nod? Those investing in NPS may have to wait and watch. In the meantime, if you haven’t set up your NPS account yet, do so today. It is never too late to start investing.