A question that pops up quite frequently in comments is how much pension will I get from NPS, and I think it’s not clear to a lot of people that the NPS itself won’t give them a pension.
There are two things that you need to keep in mind:
- NPS doesn’t pay a pension directly.
- There is no fixed rate at which your money will grow.
NPS doesn’t pay a pension directly
The way NPS works is that you invest regularly in the scheme and the scheme invests that money on your behalf.
At the age of 60 you will get the money and it will be up to you to invest it and generate an income for yourself. In this regard you can think of it more like a provident fund than a pension.
Under NPS there is no fixed rate at which your money will grow
When you open the NPS account – you will be asked to select a fund manager and your money will be invested by this fund manager. You will also be asked whether you want to choose an Ultra Safe, Safe or Medium approach, and based on your selection the fund managers will spread your money between debt and equity instruments. The rate of growth will depend on the performance of the fund managers and the choices you make, so to that extent it’s not like a bank fixed deposit where they tell you that you will get 8 or 9% interest regardless of anything else.
How to calculate pension amount from NPS?
Keeping these things in mind it should become clear that you can only get an idea of how much pension you can generate and not an accurate answer.
So, how do you get that idea?
Suppose you have the following question:
I am 28 years old – how much pension will I get if I invest Rs. 2,000 every month?
CAMS has got this great corpus calculator which allows you to input the parameters and tells you how much your final corpus will be.
In this case I’ll put in the following numbers:
- Contribution Amount: 2000
- Periodicity: Monthly
- Rate of Interest: 9.5% (Assumed)
- Number of Years: 32 (60 – 28)
The calculator shows me a value of Rs. 50,05,164.
Now, this is the amount that you will get at the end of 60 years, and you will have to invest it in order to get a pension. You could create a bank fixed deposit with it or buy an annuity. NPS requires you to buy an annuity from 40% of your money in the Tier 1 account compulsorily, but there is no such restriction on the Tier 2 account, so you can keep that in mind while opening the NPS account.
The first thing you should keep in mind is that NPS won’t pay you a pension directly, the second point is that the rate of return is not fixed either, and the third thing is when you get the NPS money you will be free (to an extent) to invest it, and generate an income for you as you see fit.