Allocate to NPS for higher debt-equity ratio, EPF for stable returns

More than eight crore members of the Employees’ Provident Fund (EPF) can now think about opting to move their retirement savings to the National Pension System (NPS) overseen by the Pension Fund Regulatory and Development Authority (PFRDA). While some procedural issues still remain, there has been some progress in this matter. DNA Money spoke with top personal finance brains on the likely routes you can take once the switch process is barrier-free.

The PFRDA has recently notified the procedure for EPF members to transfer their investments to the NPS. Also, such a switch will not attract any tax, it has clarified. However, as you may be aware, EPF and NPS are very different.

The mute question is - Should EPF members make a switch to NPS ? The answer is not easy and will vary from individual to individual.

While EPF is a pure retirement planning solution. NPS is not only a retirement planning solution but also goes beyond that by being regular pension solution.

Anil Chopra group CEO and director, Bajaj Capital, points out that applicability of NPS is wider than EPF as NPS account can be opened by any individual. On the other hand, EPF membership is restricted to salaried employees of organised sector. Thus, every EPF member can also have an NPS account whereas vice versa is not always possible, because NPS account can also be opened by businessman, self-employed professionals and even workers working in establishments where EPF is not applicable.

"The main difference between EPF and NPS is the mode of receiving retirement corpus on the date of retirement as well as potential difference in returns as the equity debt mix is different in these two schemes," Chopra says.

In case of EPF, the member gets the lump sum amount on date of retirement and then, is to take a decision on how to invest the same in order to generate regular pension type of income. On the other hand, in case of NPS, some part of the corpus is commuted on the date of retirement and balance amount is converted into regular life-long pension.

Similarly, if you compare the returns potential, NPS scores high because in NPS, the contributing member can choose the debt-equity ratio. Hence, by opting for a higher allocation to equity, the overall returns potential improves significantly. In case of EPF, investment pattern is decided by the Employee Provident Fund Organisation (EPFO) and only a small portion is invested in equity, thereby reducing the overall return percentage over a long tenure of working life which spans from 25 years to even 40 years, according to Bajaj Capital.

The rate of return for EPF is usually fixed by the Central Board of Trustees every year. For 2016-17, this rate has been fixed at 8.65%.

"You must note that EPF's return is good for a debt product. It is very competitive because at this momentm, even most banks cannot offer that return for a fixed deposit. The attractiveness of EPF remains, from a stable return perspective. What investors can do is decide the asset allocation pattern to get to their retirement corpus. Use EPF's return in the best way possible as per your asset allocation preference, and let the rest be parked in NPS that is more equity-oriented," says Ashish Shanker, head – investment advisory, Motilal Oswal Private Wealth Management.

Bajaj Capital's Chopra is of the view that a salaried employee must keep his investments equally divided between EPF and NPS so that he has the advantage of both the schemes. He thinks a 50:50 split helps the investor take the best of both the worlds. "If you split your contributions to EPF and NPS in the ratio of 50:50, your return potential will go up due to higher investment in NPS and also, at the time of retirement you will get decent corpus for your other social obligations and a regular pension as well from your NPS," he adds.

However, not everybody thinks NPS is a good option. Manoj Nagpal, MD & CEO, Outlook Asia Capital says that as of now, there is uncertainty around NPS product design. "The taxation angle and annuity purchase make it a slightly inferior product. There is no point in quickly switching from EPF to NPS," he avers.

While you can withdraw the full amount in EPF upon reaching 58 years of age, with NPS, you cannot withdraw the entire corpus until you turn 60. Even then, in NPS, you can withdraw only 60% of the total corpus amount and the balance 40% has to be used for purchase of annuity.

"The returns on annuities are not great," says Nagpal. Annuity income is also taxable.