I am going to spew a ton of opinions about the National Pension Scheme (NPS). In case you are unaware of this investment instrument, you can search online to understand the basics. I am not going to explain NPS. Instead, I will talk about why I have avoided it all this while, and neither do I feel a need to ever venture into it. It may as well turn up to be a confirmation bias for some who are in the same boat as me :), but that’s not the intention of this post. Rather I will provide some points to back my decisions.
Reason No. 1 : I do not mix investment instruments
I find pure equities the right instrument for growth. You will find Mutual Fund houses selling Balanced and Hybrid funds that have a cocktail of equities and debts. It builds more chaos in my mind. I lose track of my equity exposure at a given point in time. Whenever I feel a need to diversify into Debt instruments, I go after the exact one that suits my goals and is trackable. NPS to me falls under a similar bucket of mixing capital growth appreciation with debt exposure overlap, and annuities. It’s all so confusing to draw calculation in mind. A similar confusion I believe investors create is mixing insurance products with capital appreciation goals.
Reason No. 2 : I do not believe in annuities
Annuities are a fixed sum of money that is paid back to investors post-retirement. So the investor keeps accumulating into the portfolio through a staggered investment, and then the reverse cycle kicks in to reap the benefits.
Through NPS, one can withdraw 60% of the corpus (all tax-free which is a good thing) at the age of 60, and the rest 40% is invested into an annuity instrument to generate regular income. With annuities, I feel lesser control over my own money, and if the world changes and I feel a need to re-balance, I have no option to do that. I am locked into it for the rest of my life.
Reason No. 3 : Risk reward ratio is non-decisive
The historic NPS return has been 9-12% p.a. Debt instruments like PPF give 7.1% p.a. returns. Equities such as Index Funds have given around 12% p.a. returns while more aggressive funds in mid-cap and small-cap categories can push it up to 15-18%. As you would know, NPS returns are also linked to equity exposure. This middle path of risk to barely touch the Index performance does not incentivize me. Additionally, when I get into any form of debt exposure, I need clarity and close to 100% risk aversion.
Reason No. 4 : Lock-in period
I am more of a pre-retirement mindset person than a post-retirement. By that what I mean is, for a retirement age of say X (by which I hang up my boots and pull away from most active work which could be a salaried job or any form of own venture), I will optimize my expenses and life till X, not post that. I feel wealth is predominantly required till X, and not post that! Lock-in periods (for NPS, it is the age of 60) of any fraction of corpus is a deviation from that mindset and economic plan. That doesn’t mean I will not be saving up for life post-X, but it’s a crossroad too far from now to have your present rewards locked in!
Reason No. 5 : I do not trust the Taxation system!
Are you aware that PPF rates have come down from 8.6% p.a. in 2012 to 7.1% p.a. in 2023 ?! That’s a significant cut and severely dents your corpus when you do the compounding math.
Similarly, most recently Government has started making a portion of Employee Provident Fund interest taxable above a certain limit.
I have no clue how the NPS annuities or the taxation will change in the next decade or two, and I will be hardly surprised if it goes against the favor of taxpayers like us. Any large amount locked into the mercy of the Government calls for trouble. Having more handle and flexibility on my corpus will help me navigate and re-plan.
Reason No. 6 : Potential tax burden
NPS annuities will still get taxed at your income slab rate. And in case you have passive incomes that keep you at higher tax slabs (and that’s what everyone would aspire to be at, isn’t it ?!), then you are at the highest layer of tax liability. On the other hand, having more control of my equity and debt portions for passive income can help me plan by taxation better, on whatever the taxation rules will exist in the future.
Reason No. 7 : UI platform experience
This may not be such a big deal, but still a callout. With the banking and investment systems getting super modernized, I like the fluid experiences all these Mutual Fund Houses, Demat Services (like Zerodha), and Securities (like GoldenPi) provide and keep your investment management in your pocket. It gives me a sense of control to view, monitor, and act on my investments.
With all being said, one of the obvious advantages of NPS which cannot be ignored is the tax exemption. There are standard deductions under Section 80C and 80CCD in a fiscal year if invested in NPS. The fund management cost is also the lowest compared to instruments like Mutual Funds where the expense ratios eat off a pie of your hard-earned money. And for someone who has a lower risk tolerance level, this is a decent mid-route to address one part of retirement planning.
How investment and taxation change over the coming years, no one can predict. But as it stands now, me being a more involved investor and having a higher risk appetite level, I find the Cons fairly outweigh the Pros at the moment for NPS investment.
