When planning for retirement, one of the most important decisions is choosing the right investment option. The National Pension System (NPS) and systematic withdrawal plans (SWPs) from mutual funds are two popular routes, each offering distinct advantages.
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Here’s a detailed comparison to help you make an informed decision.
National Pension System (NPS)
The NPS is a long-term, government-backed scheme designed to provide a steady income post-retirement. It’s ideal for those seeking a regulated, low-risk option with tax benefits.
Key features:
Retirement-focused: As Kurian Jose, CEO of Tata Pension Management, puts it, “NPS is designed with one goal – to offer a stable post-retirement income, making it perfect for those looking for long-term security.”
Investment options: NPS offers a mix of equity, corporate debt, government securities, and alternate investments. Individuals under 50 can allocate up to 75% of their corpus to equity.
Tax benefits: You can benefit from tax deductions under Sections 80C, 80CCD(1B), and 80CCD(2) in the old tax regime, and Section 80CCD(2) in the new regime.
Costs: The fund management charges are extremely low (~0.09%), making it cost-effective.
Withdrawal restrictions: Withdrawals are limited before retirement, and 40% of the corpus must be used to buy an annuity, ensuring a steady income later in life.
Who should choose NPS?
- If you prefer a low-risk, disciplined approach to retirement.
- If stability and a guaranteed income through an annuity are your priorities.
- If tax-saving is important to you during the accumulation phase.
As Rajesh Khandagale, SVP at KFin Technologies, explains, “The NPS SLW (systematic lumpsum withdrawal) feature allows the lumpsum to be withdrawn in instalments, ensuring a steady flow of income even as the remaining corpus continues to grow. This makes NPS a secure option for retirees.”
Mutual fund SWPs
Systematic withdrawal plans (SWPs) from mutual funds offer flexibility, allowing you to control how and when you withdraw funds. This makes them ideal for those who want more control over their investments.
Key features:
Customisable withdrawals: You decide the amount and frequency of withdrawals, whether monthly, quarterly, or as per your needs.
Investment options: There’s a wide range of mutual funds to choose from, including equity, debt, and hybrid funds. This flexibility caters to both risk-takers and conservative investors.
Taxation: SWPs are tax-efficient due to the FIFO (first in, first out) principle, which minimises capital gains tax.
Costs: The expense ratios are higher compared to NPS, which can affect your returns.
Liquidity: SWPs offer high liquidity with no lock-in period, allowing withdrawals whenever you need.
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Who should choose SWPs?
- If you value full control over your withdrawals and investments.
- If you want flexibility and liquidity in your retirement plan.
- If tax efficiency and diversified options are essential to your strategy.
Bertram D’Souza, CPIO at Protean eGov Technologies Ltd, adds, “While NPS offers governance and low-risk options, SWPs from mutual funds provide flexibility and liquidity, making them suitable for those who want to manage their retirement income actively.”
Which is better for retirement?
Both NPS and SWPs offer distinct benefits, but choosing the right one depends on your goals:
- Choose NPS if you want a low-cost, structured retirement plan with tax benefits and a guaranteed income in retirement.
- Choose SWPs if you seek flexibility, liquidity, and the ability to manage your withdrawals and investments actively.
As Kurian Jose puts it, “NPS offers the discipline and structure that many retirees prefer, while SWPs give you the freedom to adapt your strategy as your financial needs evolve.”
Ultimately, understanding your retirement goals, risk tolerance, and preference for flexibility will guide you in choosing the best option for a financially secure future.
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