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How to build a robust retirement corpus with NPS?

4 min read Aug 21, 2023


A recent study* reveals that over 80% of urban Indians are concerned about facing financial shortages in their retirement. To avoid this situation, taking proactive steps to build a substantial retirement fund is essential for a financially secure future.

The National Pension System (NPS) can be a reliable option to help you create a robust retirement corpus and enjoy a worry-free retirement journey. Let’s understand NPS with an analogy.

What is NPS?

Think of it as a plant that requires regular watering (regular contributions to the scheme). As time passes, this plant will grow into a magnificent tree (a robust retirement corpus). When you retire from your job or business, this tree will bear delicious fruits (a steady pension) to enhance your retirement life.

It is a simple, yet effective retirement saving scheme introduced by the Government of India for its citizens. It aims to promote systematic savings during an individual's working years and ensuring a steady income during retirement.

How to get started?

There are two types of NPS accounts – Tier I and Tier II. To start investing in the NPS scheme, you need to open a Tier I account which is the primary account offering tax benefits. There is also a Tier II account available, which is optional and provides greater flexibility in terms of deposits and withdrawals but does not offer any tax benefits.

Like a systematic investment plan (SIP) in a mutual fund, you can make regular contributions to the NPS scheme at a frequency that suits you best, whether it's monthly, quarterly, annually, or any other interval that works for you. The amount you contribute will be managed by a professional Pension Fund Manager (PFM) who will invest your money in a diversified portfolio consisting of equities, corporate bonds, government securities, and alternate assets.

One of the key advantages of the NPS is its flexibility throughout the entire investment journey. For example, you have the option to choose from 10 different PFMs who will oversee your investments. Furthermore, the NPS offers two investment options: the Active choice and the Auto choice, allowing you to decide how you want your investments to be managed.

Active vs Auto: Which investment option is right for you?

If you have a good understanding of the market and feel confident in allocating funds among different assets on your own, the Active choice might suit you. This option allows you to tailor asset allocation according to your risk preferences.

On the other side, if you prefer a hassle-free approach and don't want to make individual allocation decisions, the Auto choice is perfect. It offers three readymade portfolios with different risk levels – aggressive, moderate, and conservative. Just pick the one that matches your risk comfort, and the NPS will manage it based on your age.

Ultimately, choosing between Active and Auto depends on your comfort level, market understanding, and willingness to manage allocations actively. You can switch between these options up to four times a year without any charges or capital gains tax.

How to choose a pension fund manager (PFM)?

Once you have settled on your investment option, selecting a PFM is the next step, guided by your preferences. Your PFM choice depends on factors like your risk tolerance, time horizon, the fund's historical performance etc.

For instance, if you are going for a higher equity allocation, look for a PFM who has consistently shown good performance among equity funds. Similarly, if you are leaning towards debt allocation, choose a PFM with a good track record in corporate bond and gilt funds.

Keep in mind that you can only choose one PFM to manage all four asset classes. This means you cannot choose an equity fund from one PFM and a corporate debt fund from another.

How has NPS performed?

Presented below is the performance scorecard for NPS Tier I schemes, displaying the spectrum of returns delivered by the top and bottom performers within each asset class category across different time frames.

Scheme Range Annualised returns (%) as of June 30, 2023
3 years 5 years 7 years 10 years
Equity Max 25.49% 13.85% 14.10% 13.90%
Min 22.63% 12.46% 12.57% 13.21%
Corporate Bonds Max 6.39% 8.91% 8.41% 8.79%
Min 5.58% 7.72% 7.63% 8.25%
Government Securities Max 5.08% 9.53% 8.90% 8.27%
Min 4.65% 8.73% 7.73% 7.96%
Alternative assets Max 8.61% 8.71% NA NA
Min 4.15% 5.70% NA NA

Past performance may or may not be sustained in the future. Source: NPS Trust

How to build a robust retirement corpus with NPS?

Let's see how you can create a solid retirement fund using NPS. Here's an example to show how much your retirement fund can grow by the time you turn 60.

Starting early is vital for boosting your retirement savings. For instance, if you begin investing Rs 10,000 every month from age 25, assuming a growth rate of 10% per year, you could have around Rs 3.83 crore by age 60. However, if you start investing later, your retirement fund's growth will be lower. Starting at 35 could give you about Rs 1.34 crore, while starting at 45 might only result in Rs 42 lakhs.

This example shows the power of compounding over time. By starting early and letting your investments grow, you can enjoy higher growth rates and significantly increase your retirement fund.

Young investors might consider putting more of their NPS money into equity segment. This strategy allows them to leverage the potential of long-term compounding and achieve higher returns over the longer investment horizon.

Growth of retirement corpus from a monthly investment of Rs 10,000

Current age Annualised returns*
7.00% 8.00% 9.00% 10.00%
25 Rs 1.81 cr Rs 2.31 cr Rs 2.96 cr Rs 3.83 cr
35 Rs 0.81 cr Rs 0.96 cr Rs 1.13 cr Rs 1.34 cr
45 Rs 0.32 cr Rs 0.35 cr Rs 0.38 cr Rs 0.42 cr

*Returns are based on assumptions and for illustration purpose only. Actual returns may vary.

Now, let's learn how to have a steady income from an annuity investment. Upon reaching maturity, a minimum of 40% of your accumulated savings must be invested in an annuity, guaranteeing you a regular pension during your post-retirement phase. You can even invest 100% in the annuity.

In our example, imagine you decide to invest 40% of your saved retirement money, which amounts to Rs 1.53 crore (40% of Rs 3.83 crore), into an annuity when you retire. This choice could give you around Rs 76,500 every month as a pension, if the growth rate is about 6% per year.

This arrangement offers you an easy and stress-free way to receive regular cash flow, making your retirement life more peaceful and enjoyable. By putting a part of your retirement savings into an annuity, you secure a stable monthly pension.

Also note that NPS isn't just about saving for your future – it's also a tax-friendly choice. You can save tax on investments up to Rs 1.5 lakh under section 80 CCE of the Income Tax Act. Additionally, you can get an extra deduction of Rs 50,000 under section 80CCD (1B). When you finally withdraw your accumulated savings and use some for annuities, you don't have to pay taxes. But keep in mind, the regular pension you get afterward is taxable.

Also Read: [PPF Vs NPS - Key Differences Between The Two Investment Options]

In a nutshell

NPS is a great way to build wealth and create a strong retirement plan. Opening an NPS account is a straightforward and convenient process, which can be done easily through Axis Bank's internet and mobile banking platforms. With NPS, you can take proactive steps toward securing a financially stable and comfortable retirement.

*India Retirement Index Study (IRIS) conducted by Kantar for Max Life Insurance Company

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision