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NATIONAL PENSION SCHEME
Need for Pension Pension system (also known as provident funds or superannuation funds or retirement benefits) could be regarded as a security for the life's second innings. Pension or old age income provision is an important component of the social safety net. It provides a mechanism to alleviate or reduce the risk of old age poverty and a means to smoothen lifetime sustenance to maintain living standard after retirement. Traditionally, old age income security in India has been provided by the joint family system, which, until sometime back, was ingrained in its ethos. However, the traditional family support system is gradually disintegrating due to • occupational changes (from collective occupations like farming to more individual occupations) • urbanization • Emergence of nuclear families Further, both the birth and death rates are gradually declining and with the advancement in medical sciences and increase in income levels, the life expectancy is increasing and people are living longer and spending more years post retirement than what it used to be a few decades ago. This all highlights the need for a Pension system for the elderly.
Features of a good pension system • Affordable to subscribers • Fiscally efficient • Economically sustainable • Dynamic as per the changing demography • Widest possible coverage with suitable exclusion criteria • Covers informal and unorganised sector • Offers substantial/adequate benefits/returns to subscribers
Evolution of pension system in India Pension systems have historically been confined to the organized workers mainly in government services, public sector organizations and some large enterprises in the private sector. The Indian pension landscape prior to the pension reform in 2004 comprised of the following pension plans - 1. Tax funded social pensions to provide minimum level of protection to the people below poverty line and above 60 years of age, disabled or widows under the National Social Assistance Programme (NSAP). 2. The Central Civil Services Pension Scheme 1972 which is a defined benefit pension scheme on pay- as-you-go basis for employees who joined central government service before 2004. Similar schemes exist for employees of state governments and many public sector undertakings. (When employers offer a pension plan, they can plan for the anticipated financial requirements of the pension plan and set aside a certain amount of money on a regular basis - and invest the money to ideally grow the fund. Conversely, certain employers elect to fund the pension plan out of current earnings. This is a pay-as-you-go unfunded pension plan, and the future of such plans can often be put in danger by unexpected events.) 3. Employees’ Provident Fund (EPF) and Employees’ Pension Scheme (EPS) administered by Employee’s Provident Fund Organization (EPFO) for the notified establishments both in public and private sector employing 20 or more employees, EPF and Miscellaneous Act, 1952. 4. Statutory occupational Provident Funds like the Coal Mines PF, Seamen’s PF, Assam Tea Plantations PF, etc. 5. Superannuation/ retirement pension plans offered by life insurance companies and mutual funds and the Public Provident Fund offered by Government of India through banks and post offices, which any individual can join on voluntary basis and are primarily driven by tax incentive/ deductions for contribution. The need for pension reform in India was driven by - (i) the budgetary strain of civil services unfunded, defined benefit, pay as you go pension system on the one hand and (ii) the need to expand the coverage of old age income security to the vast unorganized sector which accounts for over 84 per cent of the working population. India made a conscious move to shift from the defined benefit pay-as-you-go unfunded pension system to defined contribution funded pension system initially called the New Pension Scheme now renamed as National Pension System (NPS).
Features of NPS • National Pension System (NPS) is a defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). • Now, NPS is available to all Indian citizens between 18 to 60 years of age to make systematic investments during their active working life so as to draw pension post retirement. • NPS is mandatory for government employees, 10 per cent of their pay (basic salary plus dearness allowance) and an equal amount by the employer is credited to the pension account called Permanent Retirement Account Number (PRAN) of the employee. • Persons who join NPS on voluntary basis can invest a minimum of Rs. 1000 every year, which can be increased, based on one’s income level. • The accumulations are invested as per the investment guidelines prescribed by PFRDA in the diversified pool of financial assets comprising government securities, corporate debentures/ bonds and equity shares of well-established companies. (The subscriber has an option to select the pension fund and decide the broad investment mix (equity, corporate bonds/ debentures, government securities) as per his risk appetite) • The NPS has an unbundled architecture where different activities such as sourcing and registration of subscribers, collection of the periodic pension subscription, maintenance of the records of individual subscribers, pooling of subscribers funds, deployment of the funds in financial securities in financial markets, maintenance of record of securities, provision of periodic pension / annuities etc., are entrusted with different entities. • The Central Recordkeeping Agency (CRA) does the record keeping of the data of individual subscribers and coordinates among the different functionaries in the NPS. The CRA issues the unique Permanent Retirement Account Number (PRAN) to each subscriber, maintains database of all PRANs issued and records transactions relating to each subscriber’s PRAN, acting as the operational interface between the NPS Trust and other NPS intermediaries such as the government nodal offices, PAOs, DDOs, POPs, Aggregators, Retirement Advisors, Trustee Bank, Pension Funds, Custodian, Annuity Service Providers and the subscriber. Centralized record keeping for the NPS ensures that the individual pension account is completely portable across the geographical locations in the country, professions and employment. • On superannuation or attaining the age of 60, the subscriber has to annuties a minimum of 40 per cent of the accumulated balance in his PRAN for the periodic pension and the remaining 60 per cent can be withdrawn in lump sum. 40 per cent of the total accumulated balance withdrawn as lump sum is tax exempt. • In the unfortunate event of death of the subscriber at any time before superannuation or attaining the age of 60, the nominee has an option to receive the entire accumulated balance in lump sum without payment of any tax thereon. • NPS is available to NRIs as well both on repatriable and non-repatriable basis.
Advantages of investing in NPS • The subscriber has an option to select the pension fund and decide the broad investment mix (equity, corporate bonds/ debentures, government securities) as per his risk appetite • There are tax benefits available to subscribers under the Section 80 of Income Tax Act • The costs of investing in the National Pension System comprising of account opening and remittance charges of POPs, account maintenance and transaction charges of the CRA, Investment Management Fee of Pension Funds, Assets Maintenance charges of Custodian and the service charges of the NPS Trust, all put together, work out to less than 0.5 per cent of the assets under management which are the lowest as compared to the fees and charges on competing retirement products of insurance companies and mutual funds (this means more returns to subscribers) • The average annual return for subscribers has consistently been over 10% which is higher than comparable pension programmers
(Related Article- Securing Life's Second Innings, Page - 13 by Badri Singh Bhandari)
By: Deepak Hooda ProfileResourcesReport error
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