We all want to secure our future and ensure a comfortable retirement. The National Pension System (NPS) Vatsalya has become a popular choice for Indians looking to save for their golden years. It offers tax benefits and seems like a solid long-term investment. But before you jump in blindly, it's important to understand that NPS, like any investment, has its pros and cons.

To make things clearer for you, we’ve explained each point with a real-life example, so you can easily understand how NPS could impact your financial decisions. Here’s why you should think twice before locking your money in without careful consideration.

NPS Is like a safe you can’t open until retirement

Imagine your friend Rakesh. He’s in his late 30s and has been saving diligently. He hears about NPS Vatsalya and decides to invest a significant portion of his income into it for retirement. Ten years later, Rakesh needs funds for his daughter’s education but can’t access the money he put into NPS. Why? Because NPS is a long-term product meant for retirement, and you can only withdraw under strict conditions. This lack of liquidity is a major downside if you suddenly need cash for emergencies. Unlike other investments such as mutual funds or fixed deposits, where you can withdraw money when needed, NPS locks your money until you’re 60 years old. That’s great for retirement, but not so helpful when life throws you a curveball....

40% of your money must buy an annuity (and it might not be what you expected!)

Let’s talk about Priya, who’s 60 and ready to retire. She’s been investing in NPS for over 20 years. At maturity, Priya is excited to receive her retirement corpus, but then comes the catch: she must use 40% of that money to buy an annuity. An annuity is a product that gives you regular income during retirement, but annuity rates are often lower than expected. For example, if Priya’s corpus is ₹50 lakh, she’ll need to use ₹20 lakh to purchase an annuity, and the monthly income from it might not be enough to cover her expenses. While the annuity provides security, the returns could be much lower than what Priya hoped for, leaving her financially strained in her retirement years!

Not all of the NPS maturity amount is tax-free

Here's a situation many don’t think about: When Abhay retired, he was thrilled to know that 60% of his NPS maturity amount could be withdrawn tax-free. However, he didn’t realise that the remaining 40%, which went into an annuity, is taxable. That means Abhay’s monthly pension will be subject to income tax, which reduces his overall retirement income. So while NPS offers tax benefits during your investment phase, you still need to plan for future taxes on the annuity income. Without factoring in these taxes, you might end up with less retirement income than you had originally planned for.

You have limited control over where your money goes!

Ravi, an engineer, is someone who likes having control over his investments. When he heard that NPS lets him choose between equity and debt funds, he was excited. But soon he realised that his control is quite limited. NPS doesn’t give you the flexibility to pick specific stocks or bonds—it’s managed by fund managers. If Ravi wanted more control over his investments, he would need to look elsewhere. If you’re someone like Ravi, who likes to be hands-on with your money, you might feel restricted with NPS. Your funds are managed by professionals, but that also means you have less say in how your money is invested.

Market risks still exist

Kavita, a marketing professional, has been hearing about how safe NPS is. She assumes that because it’s a government-backed scheme, her money is guaranteed to grow. But what Kavita doesn’t realise is that the returns on NPS are market-linked. This means that her money is invested in both equity (stocks) and debt (bonds), and the returns depend on market performance. If the stock market performs well, Kavita will see her NPS returns grow, but if there’s a downturn, her returns could drop. So while NPS is relatively safe compared to more volatile investments, it’s still exposed to market risks. It’s essential for Kavita to understand that her returns aren’t guaranteed and could fluctuate.

Limited flexibility in payouts after retirement

After working hard his entire life, Rahul is ready to retire. He hopes to have full control over how and when he can access his retirement savings. But here’s where NPS restricts him. Rahul can only withdraw 60% of his corpus as a lump sum, and the rest must go into an annuity. If Rahul wanted to invest the money elsewhere or access a larger chunk of his retirement savings for a dream vacation or a medical emergency, he wouldn’t have the flexibility to do so. This limited flexibility can be frustrating for retirees who want more control over how they use their own money.

Annuity Rates Could Be Low When You Retire

Picture this: Deepa has been investing in NPS for 25 years and is finally ready to retire. However, when she goes to purchase an annuity, she realises that annuity rates have dropped significantly compared to when she first started investing. As a result, the regular pension she’ll receive is lower than what she had anticipated.

Annuity rates fluctuate with market conditions, and there’s no guarantee that they’ll be favourable when you retire. Deepa had no control over these rates, and this uncertainty could leave retirees like her with less monthly income than expected.

Final thoughts: Understand Before You Invest NPS is a great retirement tool, but it’s not for everyone, and certainly not something you should invest in blindly. Whether it's the lack of liquidity, the mandatory annuity purchase, or the tax implications, it’s essential to understand the full picture before committing your hard-earned money.

Take time to evaluate your financial needs, risk tolerance, and retirement goals. And if you’re unsure, seek advice from a certified financial advisor who can guide you through the complexities of NPS and help you determine if it’s the right fit for you.