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The National Pension Scheme or NPS is a retirement scheme launched by the Government of India in 2004. Initially only available to government employees, in 2009, it was made accessible to Persons of Indian Origin (PIO), Overseas Citizens of India (OCI) cardholders, and all working citizens between the ages of 18 and 65 years. You can begin contributing with a minimum monthly amount of ₹500 or an annual lump sum payment of ₹6,000 (NPS tier-1 account) under this scheme. The NPS offers monthly pay-outs after one’s retirement so they have a means of income during those years.
While calculating the monthly pension, many confuse NPS with the Employees’ Pension Scheme (EPS). In reality, both are different and use different methods for pension calculation. For example, EPS pay-out is determined using a fixed formula. It factors in your service period, salary at the time of retirement, and a few more. On the other hand, the amount and type of annuity investment are crucial in the NPS calculation formula.
Factors Influencing the NPS Pension Payout
The three key factors that impact your NPS returns are:
- NPS contribution amount
Unlike EPS, NPS does not put restrictions on the maximum contribution amount. Thus, you can earn a higher amount as pension during your retirement, with higher monthly contributions in your working years.
- Return on investment
When you choose NPS, your funds are invested in different asset classes: equity, corporate bonds, government securities and alternative investment funds.
The scheme allows you to allocate your funds in these asset classes based on your risk appetite. In case you opt to allocate more of your funds towards equity (maximum 50%), the expected rate of return on NPS investment will be higher.
- Annuity factor
An annuity is a crucial factor when calculating your returns from NPS. Once you attain the age of 60 years, you will have to invest at least 40% of your accumulated corpus to purchase the annuity. However, you may opt for a higher investment depending on your budget. Remember, the higher the annuity investment, the higher the pension and vice versa.
You can purchase the annuity from the NPS annuity provider through which you want to receive a pension.
Different Types of Annuities Available Under NPS
There are a total of five different types of annuities available with NPS. They are:
- Annuity for life plan with ROP (Return of Purchase Price)
- Joint life annuity plan with ROP
- Family income plan with ROP
- Annuity for life plan without ROP
- Joint life annuity plan without ROP
Among these, you can choose the annuity plan that is most suitable for you and your needs. Each of the annuity plans come with their own salient features and it is important that you understand that the same annuity will not work for different people with different investment needs. If you are still confused about the NPS return rate, you can use the National Pension Scheme return calculator.
To sum it up
Here are some things you should keep in mind when you want to invest in NPS. First, the NPS investment and annuity plan return determine your pension amount. Second, none of the factors mentioned above are under one’s control. So, the best you can do is use the NPS calculator online and invest sensibly and reap the benefits of a pension.
