The New Pension Scheme (NPS)* , after letting everyone in on it’s Tier 1 account, offers a Tier 2 account now.

Recall that the Tier 1 account was not withdrawable – you put money in, it stays in till retirement, and then you put 40% of the corpus as an annuity and the rest you can take out (but is fully taxed when you do).

The annuity is a pain – as I’ve mentioned, annuity rates are very low in India. Plus, the non availability of money in the interim is a mess as well; what happens if you have an emergency, and you need cash urgently? Like a medical situation where the retirement money is hardly worth saving instead of saving a loved one? Or a time when you simply want to retire and enjoy yourself, but you’re not 60 yet? (Note: You try to withdraw from a Tier 1 account before you’re 60, they make you put 80% into the annuity. Another collossal waste of money)

The best outcome, really, is to die. Then your spouse gets all the money as a lumpsum, no annuity and all that. But that doesn’t work out quite that well for you.

The Tier 2 lets you get a better outcome without needing to die. Anything that you don’t need to die for is a good thing; regardless of what Bryan Adams might sing.

With Tier 2, you can withdraw the money anytime, and any amount. Only, you need an active Tier1 account to open a Tier 2 account. You can transfer money from Tier 2 to Tier 1 as well. NPS has a silly need to transact four times a year at least – but if you put the money into the Tier 2 account, you can simply instruct a transfer (hopefully, online) and that should work for the minimums.

There’s a minimum account balance of Rs. 2,000 (you can start with 1,000 and put in four contributions of Rs. 250 each). You don’t get charged the annual maintenance fee of Rs. 350 that Tier 1 charges, but you pay about Rs. 30 per transaction. Fund choices, management fees etc. remain the same.

The NPS has returned over 12% as of September 2009, managing government employee funds. The regular returns for non-govt. will be higher from the high equity component. The post tax returns are quite attractive, though perhaps not comparable to ELSS. Add the low management fees, the zero entry and exit loads and the no annuity requirement; as a stable retirement product NPS Tier 2 looks like it will rock.

* When will they stop calling it “New”?

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