Experts say the move marks a shift from a “one-size-fits-all” pension plan to a more personalized, market-linked structure—though one that may blur the line between a retirement product and a pure investment scheme.
Launched in 2004 for government employees, NPS replaced a defined benefit pension with a defined contribution model. In the earlier setup, the government guaranteed a fixed pension payout. Under NPS, however, only the contribution amount is fixed—the final pension depends on the performance of the schemes.
By 2009, the NPS was opened up to private-sector employees, allowing them to make regular contributions and withdraw 60% of the corpus tax-free after turning 60. The remaining 40% must be used to purchase an annuity, which provides a monthly pension—fully taxable as per the subscriber’s income slab.
Subscribers under the earlier framework could divide their contributions across equities, government securities, corporate bonds and up to 5% in alternative assets such as REITs, InvITs and AIFs. For seasoned investors, the active choice option offered control over allocations within set limits—a maximum of 75% in equities and 5% in alternatives. Others could opt for auto choice, where the mix was automatically adjusted based on age and risk profile.
What’s changing under the new framework
Since 1 October, PFRDA has allowed pension fund managers to launch a new breed of schemes that are far more flexible. Earlier, each fund house could offer only one ‘common scheme’ per asset class. Under MSF, managers can now design and manage their own allocations across equity, debt, and alternatives—effectively creating multiple, distinct products for investors to choose from.
Take UTI Pension Fund’s Wealth Builder NPS, which targets mid-cap companies outside the top 100—offering equity exposure of up to 100%. For context, all NPS schemes, including both existing and new, cannot invest beyond the top 200 companies by market capitalisation. Equity exposure can reach 100%, making it suitable for young or mid-career investors focused on retirement corpus growth.
HDFC PF’s Surakshit Income Fund (Tier-2) limits equity to 25%, investing mainly in corporate and government bonds. Unlike Tier-1, Tier-2 funds allow flexible withdrawals, though without tax advantages. MSF schemes can also hold cash—HDFC’s fund may set aside up to 10% at any point.
ICICI Pension Fund launched a fund called ‘My Family My Future.’ This fund is designed for women, homemakers and parents and will invest anywhere between 50 to 85% in equities and debt can go up to half the portfolio allocation.
“The fund has been designed for working mothers, housewives and young parents, to help them save for their future goals in addition to generating a second income. The investors need not bother about different asset classes since the fund manager would be dynamically allocating capital between various segments based on their attractiveness. Also, the equity allocation can go up to 85% in order to maximise the long-term returns over the vesting period,” said Sivakumar, chief investment officer at ICICI Prudential Pension Funds Management Company Ltd.
While the fund is designed for a specific target customer base, the investment principles don’t really exclude others from investing in it.
As of 12 October, all pension managers except Aditya Birla Sun Life have launched MSF schemes.
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The earlier NPS plans, reclassified as ‘common schemes’, will continue unchanged. Government employees investing through the official channel cannot opt for the new MSF schemes—though they can open a separate account and invest privately if they wish.
Existing investments under the common schemes cannot be transferred to MSF schemes; only new contributions can flow into the new products. However, investors are free to move from an MSF back to a common scheme—even before the 15-year vesting period—without any tax implications.
Things to note
Early exit advantage
A major departure from the old NPS structure is flexibility in exit. While common schemes permit withdrawal only at age 60, MSF schemes come with a 15-year vesting period. This means a 30-year-old investor could exit at 45. It’s important to note that this interpretation comes from pension fund CEOs and a few fund documents, whereas PFRDA has not officially clarified.
Withdrawal norms remain the same—60% of the corpus can be taken tax-free, while 40% must be used to buy an annuity. There is also a proposal that PFRDA may also allow 80% lump-sum withdrawal (60% tax-free, 20% taxable) in future, reducing the annuity lock-in to just 20%. However, this had not been finalised and is subject to final approval.
Flexibility comes at a price
The new freedom isn’t cheap. While common schemes charged as little as 0.03–0.09% in fund management fees, MSF schemes can levy up to 0.3%. Over decades, that difference can eat into returns.
Moreover, since these schemes are brand new, there’s no performance track record yet. Advisors suggest waiting a few quarters before investing heavily or shifting from existing NPS plans.
What financial advisors say
While more choices may seem like a great idea on the surface, it may paralyse decision-making, said Suresh Sadagopan, managing director (MD) and principal officer at Ladder 7 Wealth Planners. “With many choices, the decision to choose a particular scheme also becomes difficult.”
“The NPS was designed to be a straightforward pension product for everyone. However, with the recent changes, it’s at risk of becoming as complex as a ULIP (unit linked insurance plan). Should NPS really be competing with mutual funds and ULIPs?” said Sadagopan.
The RIA also said that allowing early exit after 15 years instead of exit at 60 years or later is also the wrong signalling for a pension product. While many people want flexibility, Sadagopan said that such proposals including allowing 80% corpus withdrawal instead of 60% can go against the objective of generating a regular income on retirement.
Abhishek Kumar, RIA and founder of Sahaj Money, said that MSF schemes do not have a track record for now and hence, one should tread this space carefully. He said, one can follow their own asset allocation as per their risk appetite using the active option in NPS, instead of letting the fund managers make the asset allocation on your behalf through an MSF scheme.
“Choose up to 100% equity allocation only if you have a high risk appetite and have 15+ years to retirement,” said Kumar, founder of Sahaj Money “Products like ICICI’s ‘My Family, My Future’ plan appear to be more of gender or family targeted marketing but lack genuine product differentiation.”
MSF schemes offer greater flexibility and higher equity exposure, essential for long-term growth. However, investors should review asset allocation and retirement goals before diving into new schemes.
 lets investors go all-in on equities, pick themed portfolios, and even exit mid-career. But experts warn it could be turning too complex for comfort.){kind=link}