The NPS will soon have a risk assessment system; Know how to choose the best retirement plan


Schemes under the National Pension System (NPS) will soon have ratings which will inform investors of the level of risk associated with a particular scheme in which they choose to invest. The Pension Funds Regulatory and Development Authority (PFRDA) has issued a circular that requires fund managers to assign ratings indicating six levels of risk.

“National Pension System (NPS) schemes are becoming an important investment asset for individuals’ long-term savings and helping to create a desired corpus for retirement, if invested wisely. Investment in various asset classes of pension fund schemes would involve different levels of risks for policyholders and therefore it is desirable that adequate disclosure of the risks involved in various NPS schemes be made available for awareness raising. subscribers,” the PFRDA said in the circular.

By knowing the risk profile of the plans/asset classes, subscribers at the time of making investments can make an informed decision on the allocation of their contribution to the different asset class plans at the time of joining the plan and at the time of subsequent contributions. to diets.
Schemes under the NPS

In the national pension system, there are several pension fund managers and investment options (self or asset). It has four asset classes: equities (E), corporate debt (C), government bonds (G) and alternative investments (diagram A). The schemes falling within each of the classes have two levels. The subscriber first selects the fund manager, then he has the possibility to select one of the investment options.
NPS risk ratings

The PFRDA rules have defined six levels of risk: low risk, low to moderate risk, moderate risk, moderately high risk, high risk and very high risk. The new rules will come into effect from July 15.

Based on plan characteristics, pension funds assign risk levels to plans E-Tier 1, E-Tier 2, C-Tier 1, C-Tier -2, G-Tier-1, G-Tier- 2 and Scheme A, according to the circular.

He added that within 15 days of the close of each quarter-end month, the risk profile will be published on the respective pension fund websites under the “Portfolio Information” section.

The risk profile will be assessed on a quarterly basis, and any changes in the risk profiles will be updated on the pension fund’s website under “portfolio information”. Pension funds will disclose on their websites the risk level of plans as of March 31 of each year, as well as the number of times the risk level has changed during the year.

This circular will be effective for all existing plans of categories E, C, G and A from July 15, 2022. However, before the effective date, Pension Funds can choose to accept the provisions of the this Circular.
Level 1 and Level 2 under NPS

There are two types of NPS accounts – Tier 1 and Tier 2. The Tier 1 account is primarily for retirement savings where one has to make a minimum contribution of Rs 500 when opening the account. It also carries tax benefits under Section 80CCD(1B) of the Income Tax Act 1961.

Under NPS Tier 1, a person is allowed to withdraw 60% of the accumulated corpus contributed during their working years upon retirement, which is tax-free. The remaining 40% is converted into an annualized product.

NPS Tier 2 is an open access account with a minimum investment of Rs 1,000, where the subscriber is free to withdraw their entire corpus at any time. No tax benefits are available in this account.

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