Best Retirement Plan for Indians - NPS - New Pension Scheme

The new pension scheme or NPS is a multiple investment option - low cost pension scheme that was launched in May 2009 for Indian citizens and it is really interesting to note that you can have NPS (New Pension Scheme) with 100% debt holding. You need to just select the Active Choice, opt for 0% into Asset Class E and distribute the whole 100% between the asset classes C and G. You get a pure debt fund/very long term fixed deposit. Bingo! Also, there is Rs. 350/- annual maintenance fee and Rs. 240/- regular contribution fee (4 contributions are mandatory in an year, into each of Tier 1 and Tier 2). That makes the annual cost proposition (as of today) to Rs. 510/- if there is someone considering to save Rs. 50,000/- into NPS every year. We can also assume that NPS funds can generate a 12% CAGR over a long-term basis (a conservative and very realistic estimate). All these features of NPS plus many more including provision of fund management has made the new pension scheme the best retirement plan for Indians who are searching for best investment for retirement.

Now go through this quick calculation here (to assess the real cost of ownership of NPS investments).

In the first year

Total charges: Rs. 590 (recurring) + Rs. 40 (registration) + (0.0009%*50,000) (Fund Management Fee) + (0.0075%*50,000) (trustee fee) = Rs. 634.20/-. That is a decent 634.20/50000 i.e., 1.27% annualized expense. Very low to say the least just half of what your favorite equity mutual fund would have charged under the covers.

Net investment = Rs. 50,000 - Rs. 634.20 = Rs. 49,365.8/-.

Given that, you don't need to contribute the whole money in a lump sum, but spread over a time, an average 8% growth is assumed. Balance at the end of first year = (1 + 8%) * Rs. 49,365.8/- = Rs. 53,315/-.

In the second year

Total charges: Rs. 590 + (0.0009%*1,03,315) + (0.0075%*1,03,315) = Rs. 599/-.

See the second year's annualized expense ratio: 599/1,03,315 = 0.57% (ridiculously low cost). Net investment (in 2nd year contribution) = 50000 - 599 = 49,401. First year's investment grows at 12% (because that's starting balance). Then, it is: 1.12*53315 = 59713. Second year's contribution grow at average 8%. Then it is: 1.08*49401 = 53353. Account balance at the end of 2nd year = 53353 + 59713 = 1,13,066.

In the Third Year

Total charges: Rs. 590 + (0.0009%*163066) + (0.0075%*163066) = Rs. 604/-. See the third year's annualized expense ratio: 604/1,63,066 = 0.37% (what can you say about this/where else can you get this kind of asset management fee?). Net investment (in 3rd year contribution) = 50000 - 604 = 49396. First two year's accumulation grows at 12% (because that's starting balance). Then, it is: 1.12*113066 = 126634. Third year's contribution grows at average 8%. Then it is: 1.08*49396 = 53348. Account balance at the end of 2nd year = 53348 + 126634 = 179982. It goes on and on. Also, according to Reuters, the oldest news agency, NPS not only gives good returns on retirement but is also the best way to secure your retirement. All this makes NPS the best retirement plan for Indian citizens.