If you’re planning for retirement and looking to increase your pension fund, the National Pension System (NPS) offers a simple yet effective way to do that. With an annual top-up feature similar to SIP (Systematic Investment Plan) top-ups, you can significantly boost your pension and lump sum at retirement. By gradually increasing your monthly contributions every year, your retirement savings could grow three times more than a standard fixed investment.
Let’s break down how this works and why it’s worth considering, especially if you start young.
What is NPS?
The National Pension System (NPS) is a government-backed retirement scheme designed to help individuals build a pension fund. Whether you’re a private sector employee or a government worker, any Indian citizen between the ages of 18 and 70 can join. After opening an account, you’ll make monthly or yearly contributions until you turn 60. The funds invested in the NPS grow through market-linked instruments like equities and debt.
The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers tax benefits under Section 80C and 80CCD(1B) of the Income Tax Act.
Now, let’s explore the advantage of topping up your NPS contributions every year.
Why Top Up Your NPS Contributions?
Think of a top-up as increasing your investment amount annually by a fixed percentage. Just like a SIP top-up in mutual funds, NPS allows you to increase your contributions by 5%, 10%, or 20% each year.
For instance, if you start investing ₹3,000 per month at age 25 and increase it by 10% annually, your pension and corpus at retirement could be 3 times higher than if you contributed a fixed amount every month.
Here’s a breakdown of how a top-up can boost your pension compared to a fixed investment plan.
Fixed NPS Contributions (No Top-Up)
Let’s say, Rahul, age 25, starts contributing ₹3,000 every month into his NPS account. He continues to contribute this fixed amount for the next 35 years until he retires at age 60.
- Investment Period: 35 years
- Monthly Contribution: ₹3,000
- Total Investment: ₹12.6 lakh
- Expected Return Rate: 10% per annum
By the time he retires, Rahul will have a total corpus of around ₹1.15 crore.
Out of this:
- He can withdraw ₹51.68 lakh as a lump sum.
- The remaining ₹63 lakh will go into an annuity plan, providing him with a monthly pension of around ₹41,000.
This is a great plan, but it can get even better with top-ups.
NPS Contributions with Annual Top-Ups
Now, let’s take Raghav, also age 25, who starts contributing the same ₹3,000 every month. However, he decides to increase his contributions by 10% every year.
- Investment Period: 35 years
- Monthly Contribution (initial): ₹3,000
- Top-Up Increase: 10% every year
- Total Investment: ₹97.57 lakh
- Expected Return Rate: 10% per annum
By the time Raghav retires at 60, his total retirement corpus will be approximately ₹3.66 crore.
Out of this:
- He can withdraw ₹1.65 crore as a lump sum.
- The remaining ₹2 crore will go into an annuity plan, which will provide him with a monthly pension of around ₹1.34 lakh.
The Power of Top-Ups
As you can see, by simply increasing the contributions by 10% annually, Raghav’s retirement fund and pension more than tripled compared to Rahul’s fixed investment plan. Even though the starting point for both was the same, the compounding effect of higher contributions significantly boosted Raghav’s retirement income.
Benefits of NPS Top-Up Strategy
- Higher Pension: As seen in Raghav’s example, the top-up strategy can increase your monthly pension by 3 times or more, depending on how much you increase your contributions.
- Bigger Corpus: Topping up regularly means a much larger retirement corpus, which you can partly withdraw as a lump sum and invest the rest in an annuity for a steady monthly income.
- Tax Benefits: Contributions up to ₹1.5 lakh per year are eligible for a tax deduction under Section 80C, and you can get an additional benefit of ₹50,000 under Section 80CCD(1B).
- Flexibility: NPS allows you to adjust your top-up rate yearly based on your financial situation, offering great flexibility in planning your retirement.
By leveraging the top-up feature of NPS, you can significantly enhance your retirement benefits without drastically changing your lifestyle today.
