Stay away from Corporate NPS, if You Wish to Retire ASAP!

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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:

(1) NPS: Do no invest unless you get tax benefits

(2) NPS: Do not invest for the 50,000 tax benefit

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.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. I started looking for information on NATIONAL pension scheme. The info given is a year old. The info added this month is talking about NEW pension scheme which is different from NATIONAL p.s. After having spent over an hour with the site, joined today only, I feel it is USELESS

  2. I started looking for information on NATIONAL pension scheme. The info given is a year old. The info added this month is talking about NEW pension scheme which is different from NATIONAL p.s. After having spent over an hour with the site, joined today only, I feel it is USELESS

  3. “Why should anyone tell you when you can retire, and how to use it?”
    You nailed it!!!
    And the more we think/analyze NPS, more it is about getting locked up in an instrument with paltry annuity that too at the age 60!. (This is just for ppl who spend all their money, do no financial planning whatsoever and manage to live beyond 60 :)).

  4. “Why should anyone tell you when you can retire, and how to use it?”
    You nailed it!!!
    And the more we think/analyze NPS, more it is about getting locked up in an instrument with paltry annuity that too at the age 60!. (This is just for ppl who spend all their money, do no financial planning whatsoever and manage to live beyond 60 :)).

  5. I agree, the biggest drawback of NPS is the requirement to take up the annuity compulsorily. However i would think that anybody looking to retire early cant expect to depend only on NPS/EPF (which would be saving just 10% of their basic income). I dont think that can create enough corpus for retirement.

    Having said that if its properly planned dont you think NPS will still be better than EPF, since you do get to invest in Equities (if one can wait till 60 to take out the money). Early retirees can look to augment their income from 60 through NPS corpus + annuity pension.

    Again i am not comparing NPS to MF and other investment avenues, but comparing to EPF where employers also contribute?

    1. This is in response to Rakesh.

      If you “properly plan”, you might as well think about the time value of money and realize that whatever you would accrue due to the tax benefit would get blunted by the annuity.World over, annuity providers have not been efficient and provide very low returns. Leaving it to LIC or other insurance companies for annuity will neutralize or in any case reduce substantially all the gains you would have made in 20-30 years due to the initial tax exemption.

      Till the time annuity is done away with, NPS remains a dicey option. So where does NPS score over EPF ? If you have less than 2 lakhs in the corpus when you retire – you can withdraw all the money when you turn 60. I think that’s the only place it will score. Or if its given to the next of kin….. which would make the transfer tax free I think…

      Annuity is truly horrible and I don’t see it getting better at any point in time in future -that’s the nature of the Annuity beast …..Run the numbers and check with what you would get. It will surprise you. Heaven forbid, but if its a high inflation scenario at that point in time, your annuity will lose value faster than you could say “NPS”.

      With EPF too you are not really well off but atleast you would have the option to get it back when you retire or change jobs or a host of other scenarios.

      “I still do not buy this annuity argument and I want to go for NPS ?” I think the only scenario that this would work is if you can actively select between the different categories and score 12-14% returns from NPS every year. That would definitely be equivalent to 15-18% post-tax which could beat the MF returns.

      A plain vanilla allocation will help you to garner more funds when you turn 60. But at the time of actually using the funds that can be cashed out, it would turn out equivalent to PPF + a regular MIP plan or a good regular payout debt plan after turning 60 if you compare over 10 years.

      There is one last thing – NPS could be used as a corpus to be handed over to next of kin if you die before 70 without taking any money out of it. No taxes, and if you can manage good returns, its a okish estate planing tool for the very long term.

  6. In 30% slab I got 50K worth of investment in 35K.
    I can earn 35K in 9 days.
    I have no loans, no emis, all the money just lies in the bank. Or goes for some shares/stocks sometimes. So what the heck.
    Plus i plan to put some money in tier 2 as well.

    I know 60 years is a very long time but so is 35K a small amount.
    Not worth breaking one’s head for.

    Got my PRAN 😉

  7. Sir from exit point of view how do we compare LIC superannuation cash accumulation VS NPS for somebody who is 28 and will be with PSU /GOI until 60 yrs age. Thanks

  8. Paxdot,
    There is one more option under 80CCD(2) on contributing 10% of Basic ( + DA) as Employer’s contribution, so the investment will get you high corpus at the retirement age but having some limitation in using those corpus effectively. This is the point of discussion here..!

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