Pension plans provide financial security and stability during old age when people don’t have a regular source of income. A retirement plan ensures that people live with pride and without compromising their standard of living during advancing years. A pension scheme allows one to invest and accumulate savings and get a lump sum amount as regular income through an annuity plan on retirement.
According to United Nations Population Division, World’s life expectancy is expected to reach 75 years by 2050 from the present level of 65 years. The better health and sanitation conditions in India have increased the life span. As a result, the number of post-retirement years increases. Thus, the rising cost of living, inflation, and life expectancy make retirement planning essential to today’s life. The Government of India has started the National Pension System to provide social security to more citizens.
What are the Different Types of Pension Schemes?
A pension scheme is a retirement savings plan that provides a regular income stream through periodic payments during the retiree’s life.
Pension schemes are also known as retirement plans or annuities. There are many types of pension schemes available. Some common types include
- Defined Benefit Scheme: A pension scheme where benefits are set based on a formula and paid out to the recipient at retirement, based on the amount contributed by the employer and employee over their working lifetime.
- Defined Contribution Scheme: A pension scheme where employees, employers, and trustees pool contributions to benefit recipients at retirement. Actuarial calculations determine the amount paid out based on how much has been contributed and how long it has been invested. A Pension Scheme where contributions from employees, employers, and trustees are pooled together to provide benefits to recipients at retirement.
What is a National Pension Scheme?
A National Pension Scheme (NPS) is a Defined Contribution Scheme that provides retirement savings to the working population in India. It is a government-funded, voluntary savings scheme. The Government of India introduced the NPS in April 2006 as an alternative to the traditional pension schemes funded by employers’ and employees’ contributions.
The objective of the NPS is to provide an additional source of retirement savings for people who do not have access to any other type of pension or retirement benefits. The NPS was introduced to increase financial inclusion, promote savings, and provide dignity and security in old age for all Indians.
NPS subscribers will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of the subscriber’s life. This unique PRAN can be used from any location in India. PRAN will provide access to two personal accounts:
Tier I Account: This is a non-withdrawable account for retirement savings.
Tier II Account: This is a voluntary savings scheme. The subscriber can withdraw savings from this account whenever the subscriber wishes. No tax benefit is available on this account.
Benefits of National Pension Scheme
Some of the benefits of the National Pension System (NPS) are:
- Transparency: NPS is a sound and cost-effective system wherein the pension contributions are invested in the pension fund schemes, and the employee will be able to know the value of the investment on day to day basis.
- Simplicity: All the subscriber has to do, is to open an account with their nodal office and get a Permanent Retirement Account Number (PRAN).
- Portability: Each employee is identified by a unique number and has a separate PRAN, which is portable, i.e., will remain the same even if an employee gets transferred to any other office.
- Regulated: NPS is regulated by Pension Fund Regulatory and Development Authority, with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.
Difference between NPS Tier 1 and Tier 2 Account
| Tier 1 NPS Account | Tier 2 NPS Account | |
| Eligibility | Indian citizens between the age of 18 and 65 | An Indian citizen with an active Tier 1 account |
| Minimum Contribution to Open An Account | Rs 500 | Rs 1,000 |
| Minimum Annual Contribution Required | Rs 1,000 | No Such Requirement |
| Tax Benefits | Rs 1.50 Lakhs U/s 80C
Addition benefit up to Rs 50,000 U/s 80 CCD (1B) |
No Tax Benefit |
| Withdrawal Facility | No withdrawals can be made for the first three years.
After that, up to 25% of the fund value can be withdrawn, but only for specific purposes. Once the account holder reaches the age of 60, 60% of the fund value can be withdrawn, and the balance amount is used to purchase an annuity.
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There are flexible
withdrawal and exit rules. Withdrawals can be made at any time.
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Conclusion: Start Contributing to the National Pension Scheme Today and Plan For a Better Retirement
With the increasing number of people living longer, it is essential to plan for your retirement. The National Pension Scheme is a new initiative offering everyone a better retirement plan.
The government has set up the National Pension Scheme, which is open to everyone who contributes. It will provide an income that will help you live a comfortable life in your old age. The National Pension Scheme is a great way to start contributing now and get something out of it in the future.
