More than five years after it was thrown open to the public, the New Pension Scheme (NPS) is yet to become a popular choice. Despite very low charges, the scheme has not attracted investors in droves because of the complex procedure involved in the opening of an account. You have to literally beg the post office staff to get the paperwork done. In bank branches, the investor himself has to guide the staff on the basics of the NPS.

However, the investors who have managed to cross these barriers have found it rewarding. The NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those from the Nifty, the benchmark index they are supposed to follow. It is the corporate bond funds that have been the best performers in the past five years. Even the gilt funds have given reasonably attractive returns (see graphic).

Some financial planners believe that the NPS puts the investor in a strait jacket. The exposure to E class (equity) funds cannot be more than 50%. That is too conservative, especially for the young people who want to stay invested for longer periods and prefer a higher exposure to equity. While this is a major drawback, the NPS is flexible in other ways. It allows investors to rejig their asset allocation and even change the pension fund manager once a year. In a pension plan or Ulip, you cannot change from one company to another without terminating the plan. The other sore point is the lack of liquidity and taxability of income. The investment is locked up till the investor turns 60 years old. Before this age, a subscriber can withdraw only 20% of the corpus and use the balance 80% to buy an annuity. If he waits till he turns 60, up to 60% of the corpus can be withdrawn and the balance 40% would be annuitised. However, un like pension plans from insurance companies, the amount withdrawn will not be tax-free. The annuity income will also be fully taxable.

The NPS also offers a feature of life cycle fund. It is meant for those who are not financially savvy and can't manage their asset allocation themselves. It is taken as the default option for someone who has not indicated the desired asset allocation. Here, the asset allocation is driven by the investor's age. The 50% equity allocation reduces by 2% every year once the investor turns 35, till it touches 10%.

The NPS also offers tax benefits, besides the deduction under Section 80C. Contributions of up to `1 lakh in a year made by an employer on behalf of an employee are eligible for additional deduction under a new Section 80CCD. The contribution under this section is limited to 10% of the salary (basic plus dearness pay).