Should a pension plan allow partial withdrawals?

Published: June 18, 2015 at 10:05 am

Should a subscriber be given the option to make partial withdrawals from a pension plan?  The EPFO always allowed it. That is how mom and dad funded my education!  Which, many argue is the main reason why retirees do not have much of a corpus to speak of!

Now the pension fund regulatory and development authority which manages the NPS has allowed partial withdrawals from a tier 1 account.

Now an NPS subscriber can withdraw up to 25% from his own contributions after subscribing for 10 years.  Three withdrawals can be made with a spacing of 5 years for:

Extract from gazette

(a) for Higher education of his or her children including a legally adopted child

(b) for the marriage of his or her children, including a legally adopted child;

(c) for the purchase or construction of a residential house or flat in his or her own name or in a joint name with his or her legally wedded spouse.

(d) for treatment of specified illnesses: if the subscriber, his legally wedded spouse, children, including a legally adopted child or dependent parents suffer from any specified illness, which shall comprise of hospitalization and treatment in respect of the following diseases:

  1. Cancer;
  2. Kidney Failure (End Stage Renal Failure);
  3. Primary Pulmonary Arterial Hypertension;
  4. Multiple Sclerosis;
  5. Major Organ Transplant;
  6. Coronary Artery Bypass Graft;
  7. Aorta Graft Surgery;
  8. Heart Valve Surgery;
  9. Stroke;
  10. Myocardial Infarction
  11. Coma;
  12. Total blindness;
  13. Paralysis;
  14. Accident of serious/ life threatening nature.
  15. Any other critical illness of a life-threatening nature as stipulated in the circulars, guidelines or notifications issued by the Authority from time to time.

Think twice before hitting the debit button! Photo credit: gotdebit.com

So should such partial withdrawals be allowed?

Yes, but ….

No product should lock an investors money forever. That is plain wrong.  Even the PPF allows decent partial withdrawals. I think the allowed NPS withdrawal limit is quite small!

The biggest enemy for compounding is the investor’s  behaviour. Interrupting corpus creation with repeated withdrawals can have a huge impact on its final value and financial independence in retirement.

However, while it is possible to plan ahead and avoid certain withdrawals, like for children’s education or marriage, nothing can be done about emergencies.

As mentioned in point (d) above, if we or our dear ones are seriously ill, withdrawals are inevitable.

It is precisely to combat for such uncertainties, a pension fund should freely allow withdrawals.

However, the pension authority does not need to need to make a song and dance about it as above.

There is no need to limit withdrawals for a particular set of reasons.

If my kid gets into trouble with a loan shark, call me emotional, but I will not hesitate to withdraw from my corpus.

The point is, emergencies and exigencies in life are innumerable.

While it is good to know that part of the NPS corpus will serve as critical illness insurance, the government is sending a bad message by explicitly naming conditions for withdrawals.

Instead, it should allow at least 50% withdrawal without conditions but with a statutory warning that

repeated withdrawals will be injurious to financial health in retirement”. Something like that with an illustration.  I have a visual tool for this but forgot its name! 

Subscribers, especially young ones, via frequent awareness camps should be urged to independently plan for certain financial expenses in future (children’s education, marriage etc.). That is the right way to combat withdrawals. Not by imposing limitations.

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