PENSION

Pension means the employer provides to the employee a fixed monthly amount after his
retirement in consideration of past services. Pension can also be called as annuity.

There are 2 types of pension:

Uncommuted Pension: The employer provides the employee with monthly pension till the
lifetime of the employee starting post retirement.

Example: Manish worked for a company for past 20 years. After retirement the company pays
him Rs. 5,000/- per month in appreciation of his past services to the company.

Commuted Pension: The employee may request his employer to pay him a lump sum amount
of money on retirement rather than providing a monthly amount. The employee can even
request that out of the monthly pension, a certain part, say 50% be given to him on retirement as
a lump sum amount and receive the balance part monthly post retirement. This is known as
commuted pension. Example: Manish worked for a company for past 20 years. After retirement
the company pays him Rs. 5,000/- per month in appreciation of his past services to the
company. Now, Manish request the Company that instead of Rs. 5,000/- per month, he requires
the entire amount post his retirement itself. This is a case of commuted pension.

National Pension Scheme:-

The National Pension System (NPS) is a pension scheme sponsored by the government that was
started in 2004 for all government employees. The scheme was made open to all citizens in 2009. It
is a voluntary and long-term retirement scheme. It is regulated by the Pension Fund Regulatory and
Development Authority (PFRDA) and Central Government. In this article, you can read about the
National Pension Scheme (NPS) for the civil services exam.

Why is National Pension Scheme in the news?

PFRDA has recently announced that the National Pension System (NPS) will no longer compel
investors to convert 40% of their accumulated retirement corpus into an annuity, as poor yields on
annuities and high inflation are translating into negative returns. [Source – The Hindu]

It has also announced that the retirees will be able to take out the entire Rs.5 lakh savings in the NPS
against Rs. 2 lakh at present.
New Pension Scheme
During Atal Bihari Vajpayee’s regime, NPS was brought and rolled out on January 1, 2004.

 It has been implemented for all central government employees except those in armed forces
joining central government on or after 1 st of January 2004.

 Most of the state/Union Territory governments also notified the NPS for their newly
employed employees.

 In 2003, the government created PFRDA (Pension Fund Regulatory and Development
Authority) to regulate and develop the pension market. It was initially designed to cater for
the needs of government employees only, but later its services were expanded to include all
Indian nationals and NRIs.

 According to PFRDA, except for West Bengal and Tamil Nadu, all 26 state governments
notified and implemented NPS for their employees.

 NPS has been made available to every Indian citizen such as public, private and even the
unorganized sectors can opt for this, from May 1, 2009, on a voluntary basis.

 Tax benefits are also offered on the scheme post-2014 by the government to make it
popular.

 The total assets being managed under the National Pension System and Atal Pension
Yojana stood at ₹8.81 lakh crore as on March 4, 2023.

Who can join NPS Scheme?

Any employee from public, private and even the unorganised sectors can opt for this. Personnel
from the armed forces are exempted. The scheme is open to all across industries and locations.

The other eligibility criteria for opening an NPS account:

1. Must be an Indian citizen.

2. Must be between the ages of 18 and 65.

3. Must be KYC compliant.

4. Must not have a pre-existing NPS account.

Benefits of NPS:-

 NPS offers returns higher than traditional instruments like the PPF (Public Provident Fund).
  It offers many investment options to subscribers who also have a say in where their funds
are invested.

 The NPS reduces the retirement liabilities of the government.

 If the subscriber has been investing for at least three years, he/she can withdraw up to 25%
for certain purposes before retirement (age 60). This withdrawal can be done up to 3 times
with a gap of at least 5 years between each withdrawal. These restrictions are only for tier I
and not tier II accounts.

 The entire amount cannot be withdrawn by the account-holder on retirement [Changes to be

introduced]. As of April 2021, 60% can be withdrawn which has now been made tax-free. The
rest 40% has to be kept aside so that the subscriber can receive a regular pension from an
insurance firm.

Importance of Pension Plans

 Pension plans serve as a means of financial stability and security after retirement. It is an
insurance plan providing financial coverage for your old age and is sponsored by the
company fund. In other words, a certain amount of your current income is transferred and
stored for your future. This money is then given to the employee as the pension fund on
retirement.

Types of pension plans

 There are two types of pension plans: First, is the Defined benefit plan. Under this plan, the
company guarantees a fixed beneficiary amount to the policy holder, irrespective of the
investments made. Second, is the Defined contribution plan. Under this plan, the company
guarantees a certain amount, but the final amount depends on the investment/contribution
made.

Why are pension plans needed?

With age, we lose our potential to work and earn salary on a regular basis. The moment one feels
that he cannot continue working on regular basis, or reaches a certain age, he prefers to retire. In
such a situation, pension plans prove to be of great help as one can maintain and continue living the
life he was prior to retirement. To get maximum benefit and live a tension free life post retirement,
one needs to plan early for a pension plan. While buying a pension plan, one needs to pay a huge
sum of money. This is because a major component of the plan is fixed and the rest is used for
buying annuity. This annuity helps in paying you the pension amount regularly.

The earlier you start the better it is for your old age. Based on the amount invested, you will receive
your pension amount. Meanwhile, you will get tax benefits as per Income Tax Act, 1961.

As the terms and conditions of pension plans are complicated, it is prudent to take expert advice.
The expert will brief you on the benefits and the amount to be invested in order to get the maximum
benefit.

How Does Pension Work?

Pension is a kind of retirement income that you planned throughout your life to ensure
an income source. It is an investment that grows through regular contributions. When
you plan for your retirement at an early stage in life, it helps secure a sizeable fund.

In general, there are different ways in which pension plan functions. An individual's
pension fund can be created by sharing the contributions between their employer and
themselves. In such a case, the employer is usually responsible for the larger
percentage of it.
Additionally, an individual can create a pension fund by depositing a certain amount into
a pension plan. Upon retirement, the person will receive the payments as an annuity,
depending on the chosen plan.

It is crucial to understand what is pension to calculate the investment amount

appropriately. The main function of pension in life is to act as an income source. Hence,
it must be adequate to cater to future financial requirements.

Frequently Asked Questions (FAQs)

Q. What is an Annuity?
A. It is an insurance product that offers a fixed stream of income to the policyholder
regularly. The frequency of annuity payment may be on a monthly, quarterly, half-yearly,
or yearly basis.
Q. What is Provident Fund?
A. A provident fund (PF) is a savings scheme for retirement, managed by the
government. They grow with monthly contributions, which accumulate over time and
can comprise a retirement fund. There are further classifications to a provident fund,
depending on the nature of employment.
Q. What is the Employee Provident Fund?
A. An Employee Provident Fund (EPF) is a pension fund where the employer and
employee regularly make contributions. The employer is entitled to receive the lump
sum amount upon retiring, which includes both contributions with interest.
Q. Do I need a pension plan if I have a PF?
A. As important as it is to save money for retirement in the present, it may not be
sufficient in the future due to the effects of inflation. Therefore, comprehensive
retirement planning is required to live a comfortable life.
Q. How is a pension plan different from a term plan?
A. A term plan is essential for your family member's financial protection in your absence.
It is a safety net for unforeseen circumstances. On the other hand, a pension plan
ensures that your life after retirement will be financially secure. The maturity benefits
are different for both as well.