New Pension Scheme – How does it compare with the old one?

Pension Scheme provides stability and security during old age when a person does not have a regular source of income. There is a very different connotation of retirement as compared to what it was a decade ago. Earlier, retirement was taken care of as people used to live in a joint family with children and grandchildren around where all living needs were taken care by the earning member of the household. Today, retirement is all about financial freedom, pursuing hobbies, traveling, serving society, etc.

What is NPS -

The government of India has initiated New Pension Scheme, which works as a self-financing social security tool. This scheme was introduced a few years back, but it started attracting interest since last year or so. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Under this scheme, a person can contribute to the fund till 60 yrs of age after which one can draw an annuity for a lifetime.

National Pension Scheme (NPS) and its comparison with the old one –

1) Contribution by Employees –

• Old Pension Scheme – Under this, the aggregate of Basic Pay, allowances and special pay ranking for PF, employees need to contribute about 10%. It is deposited in the employee's personal PF account.

• New Pension Scheme –Here the aggregate of Basic pay, other allowances, special pay ranking for PF with dearness allowance, 10% is contributed by employees.

2) Contribution by Banks –

• Old Pension Scheme – Here the banks contribution is equal to that of the employees’ contribution. It is deposited in a separate account, and the balance of this account becomes the corpus fund to submit the pension to employees in the future.

• New Pension Scheme – here also the banks and employees contribute the same amount, but both contributions are maintained in a single account clubbed together. The balance of this account is invested in the pension funds.

3) Additional Contribution made by employees –

• Old Pension Scheme – employees are allowed to contribute voluntarily an additional amount that is equal to the PF amount. An Employee can stop this contribution whenever they want by giving a months’ notice.

• New Pension Scheme – Tier-2 account offers a voluntary facility where the subscriber is permitted to save any additional amount. This Pension Scheme also allows withdrawals from Tier-2 account as per the choice of the subscriber.

4) Investment of Funds –

• Old Pension Scheme – Here 40% of the funds from PF are invested in Government Securities and Government Guaranteed Securities. Next, 30% is invested in Bonds and securities of public institutions. Another 30% is invested in any of the Government securities, and the remaining 10% of the total funds can be invested in the private sector.

• National Pension Scheme –In NPS 85% of the PFM’s is invested in fixed income instruments and the other 15% is invested in equity and equity-linked mutual funds.

5) Managing of Funds –

• Old Pension Scheme – This is operated by a PF trust comprising of members selected from the management, officers union, and award staff union help in managing the funds.

• New Pension Scheme – Here six fund managers who are approved by PFRDA namely ICICI Prudential Pension Funds Management Company Ltd, HDFC Pension Funds Management Company Ltd, Kotak Mahindra Pension Fund Ltd, UTI retirement solutions, SBI Pension Funds Pvt Ltd, Reliance Capital Pension Fund Ltd help in managing NPA.

6) Returns from Investments –

• Old Pension Scheme – There is no minimum assurance return here. Banks offer less interest rate paid on the term deposits of the staff members. As of today, 8.5% p.a is being paid on the subscription made by employers and employees in most of the banks.

• New Pension Scheme – Returns under NPS highly depends on the performance of the various pension funds, and the returns cannot be forecasted.

7) Facility to avail loan –

• Old Pension Scheme – As per the guidelines made by individual banks loans can be availed for various purposes within the set limit fixed for each purpose.

• New Pension Scheme – In NPS loan facility is not given.