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Preserving the Future: The Pitfalls of Partial Withdrawals from Retirement Funds

Today, I would like to address a crucial topic that pertains to our future financial well-being: the impact of partial withdrawals from retirement funds, such as the National Pension System (NPS) and Employees' Provident Fund (EPF). While these withdrawals may seem like a solution to immediate financial crises, they can significantly affect the long-term benefits and compounding potential of these funds, ultimately hindering the creation of a substantial nest egg.

I will present to you the key points regarding partial withdrawals from retirement funds in the form of ten bulletins. Let's delve into this important discussion:

  1. Recent data from the Pension Fund Regulatory and Development Authority (PFRDA) reveals a significant increase in partial withdrawals from the NPS, growing 3.7 times in FY23 to reach 4,86,629 cases, compared to 1,31,482 cases in FY22.

  2. The majority of these partial withdrawals from the NPS were for purchasing or constructing residential houses, witnessing a remarkable rise of 4.3 times to 3,25,341 cases in FY23 from 75,292 cases in FY22.

  3. Additionally, partial withdrawals for higher education of children have grown nearly seven times to 58,360 cases in FY23 from 8,539 cases in FY22.

  4. EPF data also reveals an upward trend in partial withdrawals, with the number of cases reaching 2.3 crore in FY22, marking a six-fold increase from 38 lakh cases in FY19.

  5. Norms for partial withdrawal allow subscribers to utilize funds for higher education, marriage, construction or purchase of a residential property, and treatment of specified illnesses.

  6. NPS subscribers can make partial withdrawals after three years of joining and are eligible for a maximum of three withdrawals throughout their subscription period. Each withdrawal cannot exceed 25% of the subscriber's contributions, excluding employer contributions. There are no restrictions on withdrawals from the tier-II account.

  7. In the case of EPF, individuals can withdraw up to 24 times their monthly basic salary and dearness allowance (DA) for purchasing land and up to 36 times for house construction or purchase. For higher education, individuals can withdraw up to 50% of their share of the total EPF contribution.

  8. It is essential to avoid frequent partial withdrawals from retirement funds, as they diminish the accumulated corpus and undermine the very purpose of these funds. Consistent withdrawals reduce the tenure available for creating a substantial retirement corpus.

  9. The tenure of investment holds greater significance than the invested amount itself. Investing a smaller amount over a more extended period allows for the compounding effect to work its magic and generate substantial returns.

  10. Instead of tapping into retirement funds, consider opting for loans to fulfill specific financial needs such as building a house or financing education. Loans, such as housing loans and education loans, offer tax benefits and reduce the real cost of borrowing. In the case of a depleted retirement corpus, a reverse mortgage can be an option if you own a mortgage-free property.

In conclusion, it is crucial to carefully consider the impact of partial withdrawals from retirement funds. To maximize the benefits of these funds and secure a comfortable future, it is advisable to avoid frequent withdrawals and opt for loans when needed. By safeguarding and preserving our retirement funds, we can ensure a financially stable and secure retirement.

Thank you.

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