National Pension Scheme Calculator
As the name suggests, this calculator allows an individual to calculate the amount of pension they are likely to receive. All calculators available only provide a close estimate of the pension to be received because in reality there is no exact way to predict the growth since the pension is not paid directly and investments are always subject to market risks and outside factors that can either increase or decrease the growth rate.
Overview about NPS Calculator:
Before we begin describing the features of a NPS calculator, let us take a brief look at the scheme and its standout features. The National Pension Scheme is the Indian version of the all popular American Retirement Scheme,the 401(K). This pension scheme is setup in such a way as to allow flexibility at the same time minimising the liabilities faced by the government. The schemes depending on the structure allow for partial withdrawals and offer the members flexibility in choosing where to invest the pension funds. The NPS is open to all individuals from the age of 18 upwards and reaches maturity when the member attains the age of 60 which is considered as retirement age. The scheme has two account structures, a tier I account which does not allow partial or premature withdrawal till maturity and tier II which is a prospective payment system that allows for premature and partial withdrawals in cases of an exceptional nature and are almost always connected to healthcare.
The scheme though setup in 2004 only began excepting all citizens and not just central government employees only in 2009. This is otherwise known as the new pension scheme and also follows the same abbreviation. Here there are three account types. Tier I follows the same principle of no withdrawals whereas tier II account is an optional account and can only be accessed if a tier I account is opened and money in such accounts can be accessed freely. It also has a third type of account known as the Swavalamban account which is an account for the benefit of people residing on or below the poverty line. These accounts witness the government making a contribution of Rs 1000 p.a. for the first 4 years
The new pension scheme also takes into account the dearness allowance as a component of the contribution an employee has to make which was not part of the old national pension scheme. The contributions made by the employee will be matched by the bank and both funds will be held in the same account and the funds of the new national scheme are managed by 6 fund managers that have been approved by the PFRDA which is also the authorised regulatory body of the new pension scheme.
The way the NPS works, is that the subscriber be it a private employee or a public servant needs to make monthly contributions from the time of subscription till the subscriber attains the age of 60. Based on how much the age of the subscriber was at the time of subscription and the monthly contributions made, the NPS calculator makes close estimates of how much pension that subscriber can stand to receive. Since the contributions made towards this scheme is invested in equity, corporate debt and government securities it is quite difficult to exactly estimate the rate of interest earned by the scheme. For the year 2012-13, the scheme had interest rates varying from 12% to 14%
Subscribers of the national pension scheme are however at an advantage as they alone can decide the amount of contributions they need to make towards the scheme. The subscribers can choose the amount based on the financial commitments they have at present or based on the corpus they look forward to during retirement. The sole responsibility of coming up with an amount for contribution rests with the subscriber. Generally, the more money invested, the larger will be the corpus. Subscribers however tend to make contributions that are at least 10% of the basic income and dearness allowance. This is to avail tax benefits.
Calculators are found widely across the internet and certain banks even offer calculators of their own. These calculators offer close estimates and are very easy to use. For example if a subscriber aged 35 goes in for the NPS, the scheme reaches maturity when the subscriber attains the age of 60 so that leaves him/her with 25 years of contributing time. Let us assume the contribution made is Rs 2000 per month and the expected interest or rate of return is taken as an average of 8% then the calculator will show vital stats such as the total invested principle which in the following case will be Rs 6,00,000 and the interest earned on this which is compounded monthly and comes up to Rs 12,98,372. The total pension wealth generated in this case is Rs 18, 98,372 with a total tax saving of Rs 1, 80,000. If the subscriber makes a withdrawal of a lump sum of 20% and invests the remaining 80% of the pension wealth into the annuity plan with the expected interest rate of 8%, the subscriber stands to earn monthly pension of Rs 10,124 and the lump sum withdrawn is Rs 3,79, 674
Other reasons affecting the accuracy of such NPS calculators are the fact that tax laws may change and have an effect on the return on investments and the calculator also does not take into account the miscellaneous charges of the scheme.