National Pension Scheme: Can you plan early retirement with this plan?

The National Pension System (NPS) has emerged as a versatile retirement planning tool, offering flexibility and tax benefits that can help individuals achieve their financial goals, including early retirement.

 

While traditionally viewed as a long-term investment vehicle, NPS’s features make it an attractive option for those contemplating early retirement.

 

“With its minimum entry requirement, one can keep an NPS account by making only a ~1,000 annual contribution making it feasible even for people with an irregular income. This gives subscribers the freedom to structure their contributions based on their financial conditions. For younger people who are planning an early retirement, the ability to front-load contributions can be hugely beneficial,” said Rajesh Katoch, CEO, EZ Capital, Provider of secured loans to small businesses and individuals).

 

 

NPS offers a structured approach to retirement savings, often delivering better returns than popular investment options like bank deposits and traditional insurance plans. This is possible due to the ability of NPS to offer exposure to equity investments.

 

The power of compounding plays a significant role in NPS-driven early retirement plans. For instance, a 30-year-old investing ~12,000 monthly with an average annual return of 10 per cent could accumulate approximately ~2.35 crore by age 50, potentially enabling early retirement.

 

"For those who prefer a hands-off approach and don’t want to actively manage their investing, NPS is a solid option, offering disciplined savings with market-linked returns. The adage of something is better than nothing, fits those investors who do not want to take effort in managing their investments," said Sridhar Vetapalem, Head of Personal Finance & Wealth Management, Savart (Investment Advisor).

 

NPS Vatsalya scheme, an extension of the NPS, allows parents to set up pension accounts for their minor children. The scheme will be managed by the Pension Fund Regulatory and Development Authority (PFRDA). Minor subscribers will receive Permanent Retirement Account Number (PRAN) cards upon registration.

 

How can you create a big corpus for your child with the help of NPS Vatsalya?

 

According to a post on X by the Press Information Bureau in Chandigarh, here’s how much your child can save with NPS Vatsalya:

 

- Annual contribution: Rs 10,000

 

- Investment duration: 18 years

 

- Estimated corpus at age 18: Rs 5 lakh (assuming a 10 per cent rate of return)

 

- Estimated corpus at age 60:

 

- At a 10 per cent rate of return: Rs 2.75 crore

 

- At an 11.59 per cent* rate of return: Rs 5.97 crore

 

- At a 12.86 per cent# rate of return: Rs 11.05 crore

 

Is NPS the best option?

 

“The answer to this question is a resounding no. The feature of managed asset allocation under NPS where maximum equity is capped at 75 per cent and gradually reduces with age may be a disadvantage for an investor who is actively managing their investments. A disciplined investor who can manage money by taking better asset allocation decisions would be able to build a higher corpus for retirement with more flexibility. Mutual Funds have made this easy for investors,” Vetapalem said.

 

What are disadvantages?

 

At the age of 60, NPS subscribers must use at least 40 per cent of their corpus to buy an annuity, ensuring a steady pension. The biggest disadvantage of annuity is that the regular income will not keep up with inflation, potentially eroding purchasing power over time. Another important aspect not appreciated enough is that a person who commutes 60 per cent of the NPS corpus may be forced to manage and take investment decisions on this large corpus. The person may not have built the necessary investing skills (as NPS has managed it for them), would be forced to manage a large corpus and be prone to make bad decisions on this corpus. If they have been managing their investments from a younger age they would be better positions to manage their money in retirement.