NPS (All Citizens) is not even the size of many MF schemes. Why is it failing? For starters, NPS was made accessible to the general public through the so-called All Citizens model. But the response has been sub-par.😶 After 16 years of launch, it has less than Rs 77,000 in AUM. That's less than the AUM some MF schemes manage. So why has the govt failed to attract voluntary NPS? Here's why: 🌊 1) Broken distribution model PoPs can charge up to ₹400 for account opening and 0.5% on fresh contributions (capped at ₹25,000/year), but unlike MF distributors, they earn nothing from AUM. If a pension agent sources clients, PoPs must share their already meagre revenue. Selling MFs or life insurance annuities is far more rewarding. Retirement advisers (the RIA equivalent for NPS) have also failed to gain traction. They can charge only up to ₹1,000/year in advisory fees. 2) Losing the natural pull (Culprit: New tax regime) In the old regime, NPS is eligible for an overall Rs 1.5 lakh deduction under the old tax regime. Under Section 80CCD(1B), another Rs 50,000 is eligible for deductions if put in NPS. NPS used to sell like hot cakes due to the 80CCD (1B) benefit. That changed when the new tax regime was introduced, and many people shifted there. A whopping 72% of taxpayers opted for the new tax regime last year. It will only go up. The only tax break under the new regime is for the employer's contribution. (That part of NPS is doing well) Harsh Roongta told me that nowhere in the world are retirement products sold without some compulsion or tax benefit.🌎 It'll be interesting to see what the new PFRDA chairman does to increase NPS adoption in the non-government segment. Read: https://lnkd.in/gn38ZME8
The biggest problem with NPS is the mandatory annuity with 40% of the proceeds. This should not be obligatory for private sector employees.
Point 2 is real. NPS was my first investment from my first paycheck and I also literally forced many to open the account seeing how lucrative the product, yet simple. But considering the returns and Taxation off late, I have paused
Sashind Ningthoukhongjam, One of the biggest roadblocks in making NPS a good investment plan is its conditions around withdrawals. They are just way to strict for anyone wanting to get their money back in times of need. That's one of the reasons most advisors keep their distance. Imagine advising someone to invest in NPS and a few years later telling them you can't help them much for withdrawals, as the rules are like that. A nightmare for most people who have long-term clients.
Sashind Ningthoukhongjam I don’t quite see merit in the second point, since the employer’s contribution under Section 80CCD(2) is still deductible in the new regime. For high-income salaried users whose employers contribute under 80CCD(2), NPS is still compelling because that deduction survives the new regime.
Good, someone atleast spoke on this . There are other real issues too. 1. Distributors have no access to investors investment data, unlike mutual funds, and have to rely upon NPS companies for every bit of information 2. No entry allowed to real fintechs, no good apps available, no APIs, just closed boys group. 3. There is an NPS app by protean, if investor downloads and invests through that, commission to agent stops. While customer expects service, there is no revenue. It’s real cannibalisation of customers in bulk 4. Mandatory requirement to buy annuity for 40% of corpus, but annuity returns by insurance companies are not even beating inflation. It’s oligopoly there.
My reason to drop NPS was the 25% mandatory debt part..
I will tell you a simple thing, just ask government/PFRDA to guarantee 11% annual tax free return .. they wont need kiosk/agents it will become autosell Or Allow 80% LTV of NPS value Loan against NPS at Bank rate -3% , if they need to promote their product they will have to incentivize the consumer , because there are no doctors writing NPS prescriptions due to illiquidity and minimal tax benefits along with sub par returns
NPS is a robust financial instrument, yet many individuals struggle with understanding its significance, especially concerning their financial needs post-retirement. The concept of compounding and the benefits of locking in investments is crucial, and I believe that improved financial literacy could greatly enhance how people approach their retirement planning. The illiquidity of this asset class indeed plays a vital role in compounding returns over time
In your some of previous posts you write investing in regular MF is a mistake and now here you're writing low NPS penetration due to broken distribution model. Please get your stance right on distribution.
Ex-Banker and Co-founder at Aarthshastra Wealthtech LLP || Member of Committee for the Startup India Seed Fund Scheme formed by Manipal University , Jaipur
1moYou forgot to add three points - 1. It is highly illiquid 2. Annuity rates are low and expect to go down by the time retirement comes. 3. Tax benefit is still the best motivator in India to invest in a lockin product.