National Pension Scheme for corporate employees has gained popularity as employers can get tax benefits by showing their contribution to employee accounts as a business expense. Now the government wants to encourage NPS further by offering a choice to EPF subscribers to shift to NPS and then there are the tax sops, which I am sure you are aware of. They also seem to have appointed Dhirendra Kumar of VR online as head boy scout for trumpeting this policy.
I had earlier written two posts on the NPS:
I stand by the second post but would like to renege on the first. When I wrote that, It did not strike me that many with corporate jobs don't intend to retire at 60 or at least would like to get out asap.
Unfortunately, if you hate your job, well, dislike it mildly, and would like to quit and start off on your own or retire asap, corporate NPS is a terrible product to get entangled with.
No, I am not referring to the tax on withdrawal. Let us assume that this or future governments will make it EEE. Everyone seems to be creating enough noise about this, meaning something will give.
Corporate NPS or any kind of NPS is a terrible product because, if you wish to retire before 60 and wish to use NPS corpus, you will have to necessarily buy an annuity for 80% of your corpus value.
Of course, you can let your NPS corpus rot, excuse me, grow until are 60 and then use it, but how many can afford that? Typically early retirees would be in the 30% slab, meaning their NPS contribution would be considerable.
I for one cannot, if I want to retire early. A significant portion of my corpus is in mandatory NPS. I may have neglected the pension from my retirement planning, but I did have to use the 20% lump sum payment for calculating early retirement. Meaning, if I did not, my retirement will have to be postponed.
Why should anyone tell you when you can retire, and how to use it?
So what? Will I not get a pension for life?
Excuse me, but such questions from salaried folk baffle me. They spend years hoping for appraisals, increments and bonuses, expecting their salary to grow year on year, but seem quite content with a constant pension after retirement.
Annuitizing 80% of a corpus below 60 is a waste of money and is also a waste of annuity. The annuity rate is lower, the younger you are. Double whammy!
So aspiring early retirees with corporate NPS must either postpone retirement or not depend on the NPS at all until they reach 60.
If you are wondering, why I hate an annuity, it is because I prefer an income after retirement that increases each year in step with inflation or as close to it as possible. That is, an inflation protected income
An annuity is not capable of doing this. Some annuities increase at the rate of 3-5% but that is no where near sufficient.
Early retirees will need all the liquid net worth they can scrounge in order to work it for income generation.
If you have plans to retire early, stay away from corporate NPS. Don't invest in it for the tax-breaks. Don't invest in it period.
Stick to PPF (if the lock-in suits you), EPF, stocks, equity and debt mutual funds. You are likely to earn a high return with greater tax efficiency and way higher liquidity.
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!