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The number of subscribers in various schemes under NPS had increased to 453.61 lakh by August end 2021

The National Pension System (NPS) is slowly but surely coming of age. As part of a series of recent changes to the scheme, the Pension Fund Regulatory and Development Authority (PFRDA) which administers NPS, has now raised the outer entry age from the earlier 65 years to 70 years. A subscriber can now remain invested up to 75 years of age.

“PFRDA has revised the guidelines on entry and exit. Any Indian citizen, resident or non-resident and Overseas Citizen of India (OCI) between the age of 65-70 years can join NPS and continue or defer their NPS Account up to the age of 75 years,” the pension regulator has said in a recent notification.

PFRDA has said that move has come in the wake of numerous requests received from those who had missed out on investing in the scheme due to the age barrier of 65 years to raise the entry bar and also from existing subscribers who wanted to continue with the NPS account beyond 60 years or their superannuation.

Is the time frame enough?

While the easing of the restriction may help some to enter the scheme, the overall impact on the finances of those who enter at a later stage of their lives may not be much as the number of years for the corpus to accumulate and the compound will be too limited. A retirement corpus works best when its seeds are sown at a young age and the corpus is nurtured carefully with regular investments over a long period of time. A 5-10 year timeframe is too little to create a meaningful corpus for old age income security.

Stock markets: enticing but risky

Moreover, the NPS, which permits subscribers to have a large portion of their investments in equity may seem a very attractive proposition at present with the stock markets roaring. The BSE Sensex is at a record high of 57,000 and the Nifty-50 is hovering at its lifetime high of around 17,000.  The massive rise in the indices in a short span of a few months may make many think that the equity market is one-way traffic. The returns of various equity-heavy NPS funds at this point may look enticing. Little wonder then that requests are pouring in for the elderly to be allowed entry into the party through the NPS.

However, stocks are among the riskiest asset classes in the investment horizon. The tide may turn any time, without notice. At times, the ferocity of the fall could cause immense misery to investors. The damage could be most for those who are in the upper band of the NPS age bracket as there would be limited time to recoup the losses after entering at these high stock valuations. The market cycles are often too long for retirees to recover their losses. A sharp fall in net asset value can drive many to financial misery.

To PFRDA’s credit it has limited the equity exposure for those joining NPS beyond 65 years to a maximum of 50% of their investments under the active choice (where subscribers are allowed to choose their asset allocation) against the 75% permitted otherwise under the scheme. For auto choice (where a subscriber is unable to decide) this has been limited to 15%.

However, subscribers in the upper age group would be well advised not to be too adventurous with the investments since 50 per cent is also a very high equity exposure for anyone above 65 years. It is best to be cautious unless one is hell bent on taking risk or can lose the money without having much impact on their personal finances at that age.

Liquidity factor

Subscribers who are looking to enter by taking advantage of the revised age bracket should also take into consideration the liquidity factor in NPS. Withdrawals have conditions imposed. There is 3-year lock-in if one enters at 65. If one exits after 3 years, only 60% of the corpus will be given in lump-sum while the remaining 40% will be parked in annuities to make regular payments to the subscriber. However, subscribers with corpus of less than Rs 5 lakhs can take their entire money out.  Exit before 3 years has more conditions attached, including 80% of the corpus being put in annuity schemes.

All investors, whether it be those looking at NPS or otherwise, should study the schemes and their features thoroughly and also look at the wider investment horizon to assess the viability of other investment options to find the best fit for themselves. This is especially true for senior citizens who should be extra careful with their finances.