Thursday, May 6, 2010


There was a time when none in Northeast thought of contributing to Pension fund during their career. They were almost unconcerned of their retirement needs. Only the Government employees used to get pension that made their life easier compared to other professionals. Even the teachers of schools and Colleges never used to get pension. Large companies are to pay Contributory provident Fund and Gratuity and most of them were never paid pension. Only a handful of Multi National companies used to contribute to Pension fund managed by independent trust and LIC. Many of our readers of late have asked as to how important Pension funds are and whether all the wage earners should try to subscribe to New Pension Scheme launched by government of India during May Day Last year. Whether pension of Government is better or schemes launched by Private and public sectors insurers and Mutual Funds are better?

I would like to advice that all wage earners should be a member of a pension scheme of their choice for it helps in making their life easier and secured. The most persons fail to think of pension plan during youth. But as the time progress they realize the importance pension. To be frank enough pension by Government to its employees are boon. Now a days beside officials and clerical staff, teachers of aided colleges and provincialised schools get pension and they are a happier lot. The government’s pension scheme is inflation neutral product and is a great scheme. However the old system has been replaced by the new scheme that is only a contribution oriented pension scheme.

Beside the Government, LIC has a few individual oriented pension schemes’ like Jiban Dhara”. SBI Life, ICICI and HDFC also have their own pension schemes based on Annuity payment. But by far the best pension scheme for the” Aam Janta” or individual wage earners is New Pension Scheme launched last year. Surprisingly there are not many takers of this great scheme. I am sure in the long run people would realize its necessity and would surely subscribe. New pension scheme is a great scheme for Middle class and could be subscribed to make life easier after retirement. Franklin Templeton is the only Mutual fund which has a debt oriented pension scheme.

The new voluntary pension scheme came into force in India with young people as its main target, and hoped to reach out to the 87 percent of the nation’s workforce that remained uncovered by any retirement benefit.
The Pension Fund Regulatory and Development Authority have extended the scheme on May Day to all citizens, after introducing it for fresh recruits of the central government since Jan 1, 2004. It took 10 years of conceptualisation.

“Under the new scheme, beneficiaries can divide their investments in three categories,” These can be in equity, government securities and corporate bonds and mutual funds.

“One can opt to invest only 50 percent of the funds in equity, which will be in index funds of the Bombay Stock Exchange and the National Stock Exchange. It can be 100 percent for the other two categories,” according to “PRD Authority”. Contributions will be made towards two accounts, one of which will be entirely for savings towards retirement, which cannot be withdrawn. The other portion will be voluntary and can be encashed whenever the beneficiary pleases.

The second portion, however, takes effect only six months of joining the scheme, for which the eligibility is 18-55 years. Those who join will be allotted a permanent retirement account number so that the account can be operated from anywhere.

The beneficiaries can exit the scheme after reaching 60 years of age. They can continue only up to the time they are 70.

According to regulatory authority, out of 425 million estimated workforces in the country, as many as 370 million were still not covered under any pension scheme. “Twenty years down the line, it is expect majority of them will be covered,” But present position is very low.

Officials at the regulatory authority said that Rs.2,100 crore (Rs.21 billion or $420 million) stood invested in the new pension scheme for central government employees, giving an annual rate of return of an impressive 12-16 percent. This return is very decent when compared to debt fund based pension scheme. There is a good pension scheme also in mutual Fund domain but New Pension Fund initiated by government seemed better though there are not enough takers for unknown reasons. Perhaps this scheme needs to be marketed much more aggressively.

Six pension fund managers have been appointed by the regulator for the new scheme, with 22 points of reference - the institutions that beneficiaries can approach to join. The persons willing to join the scheme can approach Nationalized Banks and Large private banks for applications forms

The minimum contribution is Rs.6,000 per annum. The money has to be paid in at least four installments a year. No installment can be of less than Rs.500. There is no upper limit on the number of installments or the money one can put in per installment.

Upon registration,( between the age of 18-55Years) person will receive a permanent retirement account number. Minimum annual contribution is Rs.6,000. The minimum number of installments per year is four. There is no upper limit on the contribution per installment or on the number of installments.

The account would be closed in case of the death of account holder, or when account value reduces to zero and change in citizenship status. The subscribers can exit the policy before 60 years also provided he or she annuitise at least 80 percent corpus. The self initiated pension is a new concept and could be greatly beneficial to subscribers. If a person fail to contribute minimum installment in a year then he would have to bear a default penalty of Rs.100 per year of default and the account would become dormant. In order to re-activate the account, pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.
The NPS is a defined contribution scheme and the benefits would depend upon the amounts contributed and the investment growth up to the point of exit from NPS.
It should be clearly understood that as with every investment, there is a degree of risk under NPS also. The value of investment in NPS may rise or fall, but investment in equity will be maximum fifty percent or lower. It would be like a balanced fund. You would be able advice the minimum exposure to equity

In case someone start contribution to NPS at the 30 years of age he/she would need a pension wealth of Rs.319,000 (at today's prices) at the age of 60 to get a pension of Rs.2,000 per month. To realise this, he/she would need to contribute approximately Rs.16,600 every year or Rs 1350/- per month If someone contribute Rs6000/- per month he or she would get Rs10,000/- every month after sixty. So carry with the NPS till 70 and get around 20,000’/ or more per month. This is a conservative calculation. You may get more depending on the market conditions at the time of retirement. Pensioners would have an option of selecting an annuity which will pay a survivor pension to his/her spouse.


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