How much pension will I get from the NPS?

by Manshu on April 4, 2011

in Retirement Planning

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.

Conclusion

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.

 

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{ 35 comments… read them below or add one }

Vijay April 4, 2011 at 11:38 pm

Succinct! Aptly sums it up!!!

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Manshu April 5, 2011 at 5:05 pm

Thanks Vijay!

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pattu April 6, 2011 at 10:24 am

Calculating pension and calculating corpus are entirely different things.

The CAMS calculator is the same as any SIP calculator. No big deal.
The question is for a given corpus what will be the annuity. Which is the pension.The crucial point is no one knows as yet what is the annuity rate being offered on the mandatory amount which has to be invested. no one knows because it has not been decided yet!!
Shubra @ Shubramoney asked what if after 30 years you find out the annuity is only 4%!!

This is why many CFPs dont like it. As an index linked pension scheme it is good. But as a typical govt “initiative” it has not been marketed properly.

I am a central govt employee and I have mandatory NPS. I also have a quarterly SIP in Tier II.

A fact not known to many: For govt staff the equity component is only 15% while for others it is capped at 50%

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Manshu April 6, 2011 at 10:59 am

I’m amazed at how easily you dismiss something as no big deal. Don’t you need that amount to go to the next step?

Aren’t there annuities currently available from LIC and others that give you an indication of what you’re likely to get?

Can’t you restrict yourself to the min. amount in Tier 1 of 6K and then invest in Tier 2 which has no limits?

It’s easy to be critical and trivialize anything – the key is to explore features and find out what works.

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pattu April 6, 2011 at 11:33 am

The ‘no big deal’ was for the calculator. Its not a NPS calculator. It is a SIP calculator. No big deal because there a dime a dozen available. No one is sure about the interest NPS would provide. So its a guess work like any MF.

The annuities available from LIC etc. are irrelevant for two reaons:

1. LIC now offers ~ 7.5% Can anyone predict what it will be 25-30 years later!
2. What ones does with 60% corpus one takes out is irrelevant.
The annuity rates on the mandatory 40% are not clear. they should be . The product information is not complete

My point is the govt has slept over NPS. This basic information should be made available asap. People should know what they are getting into.

“Aren’t there annuities currently available from LIC and others that give you an indication of what you’re likely to get? ”

Of course I know. I am not talking retirement planning.
I am talking about the bad way in which NPS has got off to a start.

Do you know my money slept with my office earning 8% interest for 2.5 years while the govt was figuring out who should be appointed fund managers.

You appoint fund managers and then start a new scheme. Not the other way around.

Can’t you restrict yourself to the min. amount in Tier 1 of 6K and then invest in Tier 2 which has no limits?

–> A govt employee cannot contribute to TIER I voluntarily.
10% of basic + DA and a matching contribution goes into TIER I.

–> It’s easy to be critical and trivialize anything – the key is to explore features and find out what works.

All that you have explored is what is available online. Do you know how many pay and accounts officers are ignorant about NPS.
If I die today no one in my office knows about how much pension my wife will get from the 40% contribution. They dont know how to close the account how to get change details mid-way etc. etc.
They are not clear about taxation issues. etc.
There is NO precedence.
Some issues cannot be accessed by govt subscribers. They can approach NPS only via their govt office.
After nearly 4.5 years of this rubbish I have earned the right to complain.

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Manshu April 6, 2011 at 11:37 am

So, apart from complaining what else would you recommend?

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pattu April 6, 2011 at 11:53 am

Your post is about How much pension will one get from the NPS?
My response is
1. the calculator is irrelevant to this question and
2. you don’t know about what one gets from 40% of the corpus.

If you would like to know my recommendation (and I am not alone in this)
Abundant caution because with NPS not all aspects are clear. The govt is thrusting it down everyone throat after the DTC for tax saving as they seem to think that’s the only way it will become popular.

One can build a very good nest egg using MFs and PPF without using the NPS. Of course after DTC one would lose out on tax saving avenues if they dont use NPS.

Anyway who knows how long the govt would last. Maybe the next govt would throw out DTC and the NPS!

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Manshu April 6, 2011 at 12:00 pm

My whole post talks about the inability of getting a precise number, and in absence of that – how to get an idea.

If a person wants to know how much, then that person has to start somewhere doesn’t he? The whole premise of my post is that you can’t get an exact number, and that’s true for anything. In the absence of that how do you go about making a calculation. That’s what my question to you was – if someone asks you this question what would you say?

Even if you select PPF or MFs you don’t know what rate of growth you are going to get or what interest rates will look like 30 years from now or what annuity products will be available then.

If you want an exact answer to that question then you can’t do anything because there is no exact answer anywhere. If you’re concerned about annuity rates 30 years from now, how can you be comfortable with equity or debt MFs in which you don’t even know what will be return next year?

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pattu April 6, 2011 at 12:18 pm

True for everything. Agreed. How much corpus is the first step to someone in the dark. Agreed.
My point is: How much pension is an entirely different question. The annuity rates are independent of the corpus and everyone is in the dark about the 40% which is not acceptable after such long time since launch.

It important is recognize that NPS is like a new fund offer. Any financial expert would say avoid NFOs. I dont have a choice in the matter. Others do. So look before you leap.

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Manshu April 6, 2011 at 12:21 pm

I appreciate your frustration to a certain extent, and based on the questions I get from the NPS post I see that a lot of people asking those are govt. employees who don’t have a choice in the matter, so they’re in the same boat as you and are just trying to make the most of the situation.

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sahil May 11, 2011 at 3:11 am

i am a central emp about four year completed if now i want to withdraw some amount , can i do that ?

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Manshu May 17, 2011 at 12:30 pm

Not from Tier 1, you can do it from Tier 2.

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Sumeet May 29, 2011 at 10:25 pm

Can anybody tell about the tax that is to be deducted, when it is to be deducted, how much it is to be deducted ? A clear thing on tax and NPS relation for pvt and public !

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Rajdeep June 13, 2011 at 5:58 pm

Hi,

A very informative post. Thanks.
I am working in a Pvt organization. I do have a ICICI LifeTime Gold ULIP plan. Now, will it be a sensible step for me to take a NPS acount with an anual investment of 6-8k ?

Thanks
Rajdeep

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Manshu June 14, 2011 at 8:11 pm

Hi Rajdeep – thanks for the question, but as you’d notice in several comments here – I don’t comment or provide advice on what an individual should do.

There are a lot of factors that impact that decision, and I’m not in a position to analyze all of them individually.

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NAROTTM SINGH PUNDIR July 25, 2011 at 2:14 pm

I am very surprise that even govt could not decede the rule and act. for NPS. I this case many persons who susribe this scheme and died on service,they did not get there fund back. And more amazed to see that Govt. is sielent about this matter.
Wee should shout on this matter

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Mohsin khan October 21, 2011 at 1:02 am

In my openion ppf is better than nps . In nps there is no guarantee of pension amount and money growth!!! very bad. Govt play game with our money .am i correct ??? Reply

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Rahul April 2, 2012 at 8:39 pm

U r right dude.. and we can’t do anything. Is this not a open curruption by Govt of India where they bound us(government employee) to invest our money in risk, without any guaranty of getting back the fund.

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Mohsin khan October 21, 2011 at 1:07 am

In my openion PPF is better than NPS …. In NPS there is no guarantee of pension amount and money growth !!! very bad…. Govt play game with our money……am i correct ??? Reply ?………..

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Tamojyoti Bose March 21, 2012 at 10:57 pm

Can any body tell what is the formula for getting/calculating the pension amount after retirement. Let for say a person has accumulated 1 crore rs as corpus pension fund (interest +govt share + self contribution). Mandatorily he have to invest 40 lakhs(40%) through ASP(Annuity service Provier) and lumpsum 60 lakhs(60%) he can withdraw. Now how will ASP give return on this 40 lakh from day one of investment. WIll there be again NAV factor while payout. What formula will they adopt? how much will they pay monthly? will nominee get benifit. what if the corpus fund is less and it exhaust before life time or paid less to carry forward his life in old age

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Manshu March 24, 2012 at 11:53 pm

Unfortunately there is no clear cut formula for this and there is a lot of gray area on how this will be calculated so you have to make a lot of assumptions. If you read the post above you will see what I mean by that.

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Jitendra P.S.Solanki March 25, 2012 at 11:39 am

Tamyojoti,

In India we have majorly fixed annuity products where the ASP gives you fixed pension. This pension depends on the option you select like Joint Annuity, Annuity for a certain period, life time annuity with return of purchase price etc.

The rate of annuity is decide by the company. In our country we have very low annuity rates.The highest i suppose is offered by LIC to about 7%.This means the company will pay you the pension at this rate every year. So with RS 40 lakh you should be able to get roughly Rs 24000 p.m. This rate is for the option where nominee does not get anything after the death.This rates will be lower with option of return of corpus after death of the insured.However, do note that the annuity rates can be revised by the company.

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Tamojyoti Bose March 26, 2012 at 3:17 pm

I completely agree with you but in case of Govt employees where there is MANDATORY DEDUCTION of 10% from pay salary why return cannot be fixed at least a % on the amount accumulation. Otherwise the govt should allow to draw both and let the employee invest it accordingly

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Umesh Dwivedi July 29, 2012 at 8:10 pm

Hello R/sir,

I Umesh Dwivedi from ambala cantt (HR), I have opened PRAN account i.e New pension Scheme in FY 2010-2011. And till now i contributed 1000/pm .But I did not get any statement and any internet access password. Plz suggest me what should i do.

Thanks.

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surinder October 1, 2012 at 3:55 pm

all is well

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Subha Balukkarasu October 2, 2012 at 1:25 pm

I am working in a private IT company and I opened a NPS Tier 1 and 11. The government proposed tax exemption for the contribution by the employer directly up to 10% of basic pay in excess of 1laks under 80C The exemption is not available for me because I am paying directly. Most of the employer in IT company is not interested since the IT people changing their company frequently. If the government extend the tax exemption to individual subscriber more people will join the scheme voluntarily.

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SURESH October 10, 2012 at 3:16 pm

I am 53 if i joint now in NPS and invest Rs 2000/- PM what is pension for my life and what is benifit for my family after my death please give me detail

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JASBIR SINGH February 26, 2013 at 4:18 pm

I am working in casual in pvt. company , I am 48 if i joint now in NPS and how I invest of Rs PM what is pension for my life and what is benifit for my family after my death please give me detail with best bank / post office please given details

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arshad February 1, 2013 at 1:16 pm

what is the difference between normal recurring scheme in both equity and debt mkt and the NPS.

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Manshu February 1, 2013 at 5:56 pm

I think you mean the difference between a SIP in a mutual fund or a debt fund and SIP, and there are a lot of differences between how the money is invested, lock in period, taxability and what you do after the money is returned to you. These are not strictly comparable I would say.

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ashutosh mishra December 12, 2013 at 3:52 pm

hi sir i 44

i take nsp last two month.pl.give me advice.

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ashutosh mishra December 13, 2013 at 10:49 am

i am working in pvt.i am 41 if i join now in nps and i invest of rs1000.pm what is pension for life and what is benifit for my family after my death pl
give me advice.thank sir.

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randhir kumar jha February 25, 2014 at 2:08 pm

i am working in pvt.i am 41 if i join now in nps and i invest of rs1000.pm what is pension for life and what is benifit for my family after my death pl
give me advice.thank sir.

REPLY

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Alak Jana June 20, 2014 at 1:04 pm

I am opening NPS a/c from last 26.06.2014 form The South Indian Bank Ltd and invest Rs. 1000/- per month, also received NPS statement on 19.06.2014 form Bank , this is very good option for pvt. company employee. So take it for tension free after retirement.

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niladri August 4, 2014 at 3:01 am

pretty good option, seems to be. around 10% interest rate with minimum 40% annuity is good. nominee option available, so if u die after investing till your 60th year, your nominee will get the pension/ lump sum amount. but if you die before 60, your nominee have to pay for the rest of years, to earn his/her pension. go for it….

Reply

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