NPS vs APY: Which one is better pension scheme?

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Retirement is a stage of life that is completely different from our working and earning lives. For many, it represents the end of their earning potential. So, retirement planning is also one of the most important elements of life. There are multiple instruments to save for retirement. A retired person usually does not want to take financial risk and prefers guaranteed return. The government offers two popular pension schemes- National Pension System (NPS) and Atal Pension Yojana (APY).

Both the schemes are regulated by Pension Fund Regulatory and Development Authority (PFRDA) and contributions to both schemes are tax-deductible up to a maximum of Rs 1.5 lakhs under section 80 CCD (1). One can opt for one based on one’s preferences.

National Pension Scheme

National Pension Scheme (NPS) is the government’s retirement cum investment scheme. Through this scheme, an individual can build a big corpus for himself/herself. Employees working in the government except armed forces staff, private, public, and unorganised sectors can subscribe to this scheme. After the age of 60, an individual can withdraw 60% of the invested amount. The rest 40% is used to provide annuities to the subscriber.

Atal Pension Yojana

Atal Pension Yojana (APY) is a government sponsored social security scheme, which was launched in 2015. All bank account holders can join the scheme, which offers a minimum pension of Rs 1,000 and a maximum of up to Rs 5,000 a month. It offers a guaranteed pension after the age of 60.

NPS and APY: Differences

Despite certain similarities, NPS and APY are somewhat different from each other. Take at some of the key distinctions between these two:

Age limit: NPS has an entry age of a minimum of 18 years while the maximum is 70 years. On the other hand, Atal Pension Yojana has the entry age 18 years and the maximum age being only 40 years.

Eligibility: NPS allows investors who are citizens of India as well as NRIs to invest in the scheme. On the other hand, Atal Pension Yojana is only open to resident Indian citizens.

Guaranteed return: While NPS doesn’t guarantee a pension post retirement, APY offers triple benefits of lifelong pension to the subscriber, lifelong pension to the spouse after the subscriber’s demise. Moreover, after the death of both of them, the entire corpus is returned to the nominee.

Partial withdrawals: For partial withdrawals, in case of NPS, you must meet certain specific conditions. You can withdraw a maximum of 20% of the corpus before you turn 60 years old.

Under the Atal Pension Yojana you will not be allowed to withdraw the money invested prior to the end of the term. Only in the event of the investor’s death, or serious illness, is it possible to withdraw the accrued balance early.

Risk factors: The contributions in the APY scheme are only allocated in government securities in a specific way. On the other hand, the funds invested in the NPS, are invested in four types of funds: ultra-safe, conservative, balanced and aggressive. It is invested in equities and bonds. The investor can decide on the deployment of funds according to his/her risk appetite.

Maturity withdrawals: APY offers a guaranteed pension after the age of 60. While, in the case of NPS, it is mandatory for 40% of the matured amount be invested in annuities.