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HDFC, Kotak Pension Tier-II funds top three-year return charts

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© Ritesh Presswala HDFC, Kotak Pension Tier-II funds top three-year return charts

The National Pension System (NPS) is fast growing in popularity as a retirement planning tool, but there’s more to the scheme. After opening the retirement account (Tier I), which is mandatory, subscribers can also open an investment account (Tier-II).

Investments made in tier-II accounts will not fetch you any tax benefits unlike Tier-I, but you will benefit from the lower charge structure that NPS offers. As per new NPS rules, the maximum investment charge  is capped at 0.09 percent. Moreover, central government employees can claim tax deduction under section 80C for investment in Tier-II within the overall limit of Rs 1.5 lakh. However, this investment will carry a lock-in period of three years, as is the case with equity-linked saving schemes (ELSS).

Restriction on withdrawals

Also, tier-I account comes with withdrawal restrictions – only 60 percent of the corpus at the age of 60 can withdrawn as lump-sum and the balance has to be converted into annuities. In case of premature withdrawal where the corpus size is over Rs 5 lakh, you are allowed withdraw only 20 percent, and use the balance to buy annuities. This is not the case with Tier-II account – you can withdraw anytime, except in case of central government employee aiming for tax benefits. However, if you are investing in equities through this account to achieve a long-term goal, it is best not to make withdrawals before your reach your goal.

At present, however, the performance of Tier-II equity pension funds (schemes E), barring a couple, has been lacklustre when compared to benchmark Sensex and large-cap mutual funds category average (see table). Only three (HDFC  Pension Fund, Kotak Pension Fund and ICICI Prudential Pension Fund) out of seven Tier-II pension funds outscored their mutual fund peers over the three-year horizon, as per data from Value Research as on September 20, 2021. This figure dropped to two over five years. None of the pension funds managed to beat the benchmark Sensex during the two return periods.