MY MONEY: ABC of pension for minors

The launch of the National Pension System (NPS) Vatsalya scheme — the pension scheme for minors — by Union Finance Minister Nirmala Sitharaman promises to be a gamechanger.

Under the scheme, parents can open and manage investment accounts on behalf of their minor children and ensure a structured approach to savings and investments. This not only instils a sense of financial discipline from a young age, but also sets the stage for robust financial planning as the children attain adulthood.

Parents can begin saving for their kids’ retirement even before the child turns major. Once the child reaches 18, NPS Vatsalya will seamlessly convert into a regular NPS (National Pension Scheme), which is currently the most effective retirement investment option. There’s also an option for partial withdrawal.

Aimed at strengthening long-term financial security and fostering the habit of early saving, the scheme is designed exclusively for minors, marking a significant advancement in financial planning.

About the scheme

Parents can invest a minimum of ~1,000 per month with no upper limit. A minimum investment of ~1,000 per annum is required. Further, there is no maximum limit on the amount that can be contributed. The scheme is designed to be operated by parents until the child reaches adulthood, at which point the account transitions into the child’s name. The account can then be seamlessly converted into a regular NPS account or another non-NPS scheme.

With the promise of substantial wealth accumulation through the power of compounding, the scheme envisions providing a dignified and secure financial future for its subscribers.

Opening an account

Under the scheme, all minor citizens up to the age of 18 are eligible to open an account. The account is opened in the name of the minor and managed by the guardian until the child reaches adulthood, ensuring that the minor remains the sole beneficiary.

The account can be created through registered Points of Presence (PoPs) with the Pension Fund Regulatory and Development Authority (PFRDA). These PoPs include major banks, India Post and pension funds, with both online and physical modes available for account setup.

For those seeking an online option, the NPS Trust’s eNPS platform provides a convenient and secure method for account creation and management.

The scheme is regulated and administered by PFRDA.

On attaining adulthood

When the minor reaches the age of 18, the NPS Vatsalya account undergoes a seamless transition to the NPS Tier-I (All Citizen) model. As part of this process, a fresh KYC (know your customer) process must be completed within three months from the date of turning 18.

Once the account transitions, the features, benefits and exit norms applicable under the NPS Tier-I All Citizen model will come into effect, providing continued financial security and investment opportunities for the individual.

What experts say

By introducing a specialised pension scheme for minors, the government aims to ensure that children develop disciplined saving habits and benefit from long-term wealth accumulation through compounding.

According to Rahul Bhagat, CEO at DSP Pension Fund Managers, one of the most compelling aspects of the NPS Vatsalya scheme is its flexibility. As minors reach adulthood, these accounts can seamlessly transition into regular NPS accounts, continuing to build upon the initial investments made during their formative years.

“In essence, the NPS Vatsalya scheme represents a forward-thinking approach by the government to empower families with the means to plan for their children’s future responsibly. It encourages savings and investment habits that will undoubtedly benefit our society as a whole in the long run,” he adds.

Certified financial planner Lt Col Rochak Bakshi (retd), founder and CEO of True North Financial Services, however, feels that investing in mutual funds is a better option compared to the scheme. He says, “The corpus accumulated will be illiquid till the age of 60. It is better to invest for the child in pooled investments like mutual funds and then hand over the assets to the child on reaching majority. These mutual funds can be aggressive and thus would have a better returns profile. At the same time, these will encourage active participation of the child in learning about personal finance issues.”

The way forward

The best investment options for the child’s future, say experts, vary from person to person depending on the financial goals, risk tolerance and investment horizon. If an individual is seeking a long-term, retirement-focused investment with tax benefits and a balanced risk-return profile, then NPS Vatsalya could be a suitable choice. However, if an individual is looking for higher returns and liquidity, equity and mutual funds would be more appropriate. Take your pick.

Documents required

• Proof of date of birth: Documents such as birth certificate, school leaving certificate, matriculation certificate, PAN or passport will be considered.
• KYC of the guardian: Aadhaar card, driving licence, passport, voter ID card, NREGA job card, or National Population Register documents can be submitted.

TAX BENEFIT

Subscribers can benefit from tax deductions under Section 80 CCD (1) and Section 80 CCD (1B) of the Income Tax Act, making it a tax-efficient investment option.

Flexibility to choose

Guardians have the flexibility to select from a variety of pension funds registered with the Pension Fund Regulatory and Development Authority (PFRDA) for managing the investments.

• Default choice: The Moderate Life Cycle Fund (LC-50), which allocates 50 per cent of the investment to equity.
• Auto choice: Under this option, guardians can select from three Life Cycle Funds based on their risk tolerance. The Aggressive LC-75 allocates up to 75 per cent of the investment in equity, suitable for those with a higher risk appetite. The Moderate LC-50 allocates 50 per cent in equity, offering a balanced approach. For those seeking a more conservative strategy, the Conservative LC-25 allocates 25 per cent in equity, minimising risk while still providing growth potential.
• Active choice: Under this option, guardians have full control over how they allocate funds across four asset classes. They can invest up to 75 per cent in equity for higher growth potential, up to 100 per cent in corporate debt for stability, up to 100 per cent in government securities for safety, and up to 5 per cent in alternate assets for diversification. This allows guardians to tailor the investment strategy based on their financial goals and risk preferences.

  Withdrawal options

• Partial withdrawal up to 25 per cent of contribution on a declaration basis after lock-in-period of three years for education, specified illness and disability for maximum three times till the subscribers attain 18 years of age.

Exit upon attainment of 18 years subject to...

• Accumulated corpus is equal to or greater than ~2.5 lakh. At least 80 per cent of the balance is to be utilised for the purchase of annuity and the remaining balance can be taken in lumpsum.
• Accumulated corpus is less than ~2.5 lakh option to withdraw entire balance as lumpsum.
• Death of the minor: Entire accumulated corpus is returned to the guardian.
• Death of the guardian: Another guardian to be registered through fresh KYC. In case of death of both parents, the legally appointed guardian can continue the account with or without making contribution to the account, and upon attainment of 18 years of age, the subscriber has an option to continue or exit from the scheme.