The word ‘Pension’ can create a kind of consciousness to each 30 plus years old working person later or sooner in his life. It is one among the main concerns to government when it works to provide a safe life to the senior citizens. The Indian government has finally arrived at a great solution known as New Pension Scheme like a step towards safeguarding people’s post retirement life.
New Pension Scheme and PFRDA
Pension Fund Regulatory and Development Authority (PFRDA) was established in 2003 which took the responsibilities to frame the guidelines for pension sector. This authority implemented its’ very first scheme in the year 2004 by simply making it compulsory for each employee of the central government for opening and holding retirement account in bank.
In this scheme for the central government employees, a certain part of their salary gets deducted as the pension fund premium each month. The most excellent part is that the government contributes equal amount from its side to the individual employees’ pension account.
Though there were some schemes from government which acted as saving cum tax cutting instruments, there was no completely fledged pension plan for the common people from the government before the year 2009. However, New Pension Scheme has made the way for each working citizen in India to save a part of their incomes for their pension amount.
There are 4-5 units which combine together to offer this facility. One body is there to regulate and check functioning of the pension sector, another is there to maintain the record and arbitrate between the account holder and the funds, one body which handles the annuities and many more different agencies are involved in handling the NPS.
Features of New Pension Scheme
Investment method: If an account holder does not have any idea about how to divide his investment base, a default method will be used to divide this investment. This default strategy has two different parts based on age of account holder. When the account holder’s age is lesser than 35 years, then equity is given maximum priority followed by debt scheme and finally government bond. After the account holder’s age crosses 35 years, investment in government bond is increased and the other two are decreased gradually, ending up with 80% finally of his investment in government bond and rest in other two by the time account holder reaches the age of 60.
Nature of this scheme: This scheme is a dynamically participating scheme which invests part of premium in government security, equity, and also debt scheme of corporate. The level of investments in different areas could be decided by Permanent Retirement Account holder.
There are a few fund managers who can take proper care of investing these funds corpus in diverse areas. This scheme comes in particular branches of post office, NBFCs, approved banks, and also in a few insurance companies. An account holder also will have an alternative to select from many fund managers.
Premiums: The smallest premium any individual can pay towards a NPS/month is INR 500 and it is INR 6000 annually. The person also gets an option for paying the premium annually at once, but it is compulsory that he has to pay it towards the account once within a year at least.
Penalties: If PRA holder fails in paying his/her annual premium, there is a great option where INR 100/yr could be paid together with the minimum yearly premium to continue this scheme.
Withdrawal: After the PRA holder is 60, he has the opportunity to take 40 percent of amount in his account. The remaining 60 percent will be utilized by PFRDA in order to pay back the pension in regular instalment. If PRA holder wants to withdraw the sum before 60, he/she is eligible to take 20 percent of the amount accumulated in account. The remaining 80% will be paid as pension.
Nomination: The nomination facility is available with the account where nominee is entitled for the accrued amount, anytime PRA holder expires.
Pros and Cons
Pros:
- This scheme involves funds that require extremely low management fees as compared to the other funds.
- This scheme works on principle of generating your pension based on income earning competence of account holder.
- This account and the funds are portable, so even if account holder’s office or residence gets shifted to different city he can maintain same account.
Cons:
- This scheme unlike the other pension plans doesn’t provide any guarantees on the sum which gets accrued by end of term.
- The tax benefit under this scheme aren’t indicated very clearly when opening an account.
Though this scheme is confirmed to be available for people of every economic class, the extent of advantages through this scheme isn’t very clear than a few policies of the other insurance companies.
