‘Pension’ the word would create a sort of consciousness to every 30 plus year old working person sooner or later in his life. Pension is one of the major concerns to governments when it works in the direction of providing a secure life to its senior citizens. Indian government has arrived at a solution named New Pension Scheme as a step towards securing the post retirement life of citizens.
New Pension Scheme (NPS) and Pension Fund Regulatory and Development Authority (PFRDA):-
A regulatory body was established in the year 2003 that took the responsibility to frame guidelines for working of pension sector. The authority implemented its’ first scheme in 2004 by making it mandatory for every employee of central government to open and hold a permanent retirement account.
In the schemes for central government employees there is certain part of the salary that gets deducted as pension fund premium every month. The best part is that government contributes an equal amount from it’s’ side to the pension account of individual employees.
Although there were schemes from the government that acted as savings cum tax cutting instrument, there was no fully fledged pension plans for common citizens from the government prior to 2009. The New Pension Scheme from PFRDA made way for every working citizen of India to save part of their income for their pension.
There are four to five units that combine to provide this facility. A body to regulate and monitor functioning of pension sector, a body to maintain the records and mediate between the funds and the account holder (Central Record – keeping Agency), a body that handles the annuities (Annuity Service Provider) and many more agencies involve in handling NPS.
Features of NPS:-
Nature of scheme: The scheme is an actively participating scheme that invests part of the premium in equity, government security and also debt schemes of corporates. The level of investment in different areas can be decided by the Permanent Retirement Account (PRA) holder.
There are fund managers who take care of investing the fund’s corpus in different areas. The scheme is available in specific branches of approved banks, post office, NBFCs and also in few insurance companies. The account holder will also have an option to choose from different fund managers.
Investment method: If the account holder has no idea of how to divide the investment base then there will be a default method used to divide the investments. This default investment strategy has two parts based on the age of the account holder.
If the account holder is less than 35 years old then equity will be given maximum priority (about 50% his/her investment) followed by debt schemes and finally government bonds.
Once the account holder crosses 35 years of age, investment in government bonds is increased and that of the other two is decreased step by step finally ending up with at least 80% of his/her investment in government bonds and the rest to be in other two (shared equally) by the time the account holder is 60.
Premiums: The minimum premium a person can pay towards NPS per month is Rs 500 and annually it is Rs 6000. The person also has an option to pay the premium at once annually but it is mandatory that he/she has to pay towards the account at least once in a year.
Penalties: If the PRA holder fails to pay his/her yearly premium then there is an option where Rs 100/yr can be paid along with the minimum annual premium to continue with the scheme.
Withdrawal: Once the PRA holder turns 60, he/she has the option to take 40% of the amount in the account. The rest 60% will be used by PFRDA to pay back pension in regular installments. If the PRA holder wishes to withdraw the amount before 60 then he/she will be eligible to take away 20% of the amount accrued in account. The rest 80% would be paid back as pension.
Nomination: Nomination facility is also available with this account where the nominee is eligible for the amount accrued, anytime the PRA holder expires.
Recently this scheme was extended to Indians who are working outside the country.
Pros and cons of NPS:-
The scheme involves a fund that requires very less management fee as compared to other funds.
The scheme works on the principle of generating pension based on the income earning capacity of the account holder.
The account and the fund is portable which means that even if the account holder’s residence or office gets shifted to a different city he/she can maintain the same account.
The scheme unlike other pension plans does not provide any guarantee on the sum that gets accrued by the end of the term.
The tax benefits under this scheme are not very clearly indicated during opening an account.
Although the scheme is stated to be meant for people of all economic classes the extent of benefits through this scheme is not very better than few policies of other insurance companies.
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