Changes Made In The NPS Will Have A Big Impact On Retirement Planning

The biggest challenge for individuals retiring in our country has been the lack of a social security system to provide a meaningful family pension income post retirement. Unfortunately, this challenge may still take time to get addressed. The second biggest challenge for savings towards retirement has been creating portfolios that beat inflation. Inflation is to retirement portfolios and financial health, what high blood pressure or diabetes are to physical health, a silent killer. Luckily there is help on hand to deal with this, especially with the changes introduced in the National Pension System (NPS), the targeted savings solution that still struggles to get enough attention for individuals planning for retirement.

While there have been multiple changes in the NPS over the years, one of the recent changes made in the NPS, which allows higher equity exposure, has a very significant impact on retirement planning. Essentially, this change in feature in the NPS has made it even more attractive for NPS investors. The NPS now allows multiple variations with higher equity exposure whilst planning for retirement, making it far more capable of beating inflation challenges in your retirement portfolio. Whilst investing in NPS, investors have always had the choice of choosing from two options: active and lifecycle.

For NPS investors choosing the active option, the investor can choose his asset mix amongst four asset classes as per his choice – Equities (E), Corporate debt (C), government securities (G) and alternative investment funds (A). Prior to this change, the exposure to E was capped at 50% of the portfolio. With the recent changes, the maximum permitted allocation to E has now been enhanced to 75% up to 50 years of age. From 51 years onwards, the maximum equity allocation allowed will keep reducing by 2.5% per annum, and become a maximum 50% at the age of 60.

For NPS investors who prefer using the auto choice option, as they may not believe they are skilled enough to make decisions across the four asset classes ie E, C, G and A, the investor can use a lifecycle fund which also has three variants – LC 75, LC 50 and LC 25.