We all need to have a financial and social security after our retirement from active work. This is required to meet our day-to-day expenses as well as some of our wishes or enjoyment in the postretirement period. The New Pension Scheme, named as National Pension System or NPS was launched by Government of India to provide this financial security to all of its citizen. Before launch of this scheme, there was no such scheme in place to secure the later period of life. Of course, now there are various schemes available from different fund houses to take care of postretirement period.
What is New Pension System ?
This scheme was launched with effect from January 1, 2004.It is contribution-based retirement scheme. Under this system, A retirement account is opened and a Permanent Retirement Account Number or PRAN is allotted to the subscriber. The subscriber to NPS keeps contributing a certain amount to this retirement account monthly or annually which keeps on accumulating till his retirement, resignation or death whichever earlier. After any of the later events, the amount is redeemed back to the contributor or nominee.
The maintenance and record keeping of NPS is done by National Securities Depository Limited (NSDL) as the Central Recordkeeping Agency (CRA) for NPS, which was appointed by the Pension Fund Regulatory and Development Authority (PFRDA) .
Who can opt for New Pension System ?
Every citizen of India above the age of 18 years can opt for New Pension System.
The New Pension System has been made mandatory for all the Central Government employees appointed on or after January 1,2004. Almost all the States have also adopted this system of pension for their employees.
How to get your New Pension Account ?
To apply for NPS, you should be citizen of India with age above 18 years. You can Download the Application Form (3 copies) and after filling it, submit it to your Pay & Accounts Office (PAO) along with copies of your Date of Birth Certificate, Your Appointment Letter, Joining Letter and a Passport Photograph. All these documents should be attested by your Drawing & Disbursing Officer (DDO) and you would need to submit a Covering Letter also, assigned to the PAO with request for allotment of Permanent Retirement Account Number. Account opening fee is ₹ 470 which is deducted from your account and after than there are ₹ 350 per year charges for account maintenance.
You may get your PRAN number in a month or so which will include User ID, Password for Online Login, T-Pin and I-Pin. T-Pin you require to talk to their customer care number (1800 222080). With your PRAN, you can Login into your account and check your account details and the amount in your account. Besides, you may also get annual account statements.
How New Pension System works ?
We talked above that NPS is contributory fund scheme. The subscriber to the NPS contributes a certain amount to his account. The contribution system is different for Employee or Non-employee Individuals.
Employees: If you are a government employee, an amount equal to fixed 10% of your Basic Pay+Grade Pay+Dearness Allowance (DA) will be deducted from your salary every month and deposited to you PRAN account number. For Medical officers, this also includes NPA (Non-Practice Allowance) as NPA is a part of pay as per Government Notifications. The equal amount will be contributed by the employer, the Government, to your PRAN account. There are some employees hired by private companies too where the employer also contributes equal to the employee contribution unlike others.
Non-employees: For Non-employees’ contribution is made by the subscriber only. No Government contribution is there. There is a minimum contribution of ₹ 6000 required every year to keep the account active. This can be done in instalments where minimum amount for an instalment is ₹ 500.If you don’t do this, your account will become dormant, and you will need to pay penalty of ₹ 100 along with the minimum contribution amount to reactivate the account.
The benefit to non-employees is that they get the option to save money for their future, taking services of professional fund managers at meagre costs.
New Pension System structure
The contributions keep coming to your account. The NPS account is two tier system:
Tier 1:- In Tier1, you are not allowed to withdraw any amount before your retirement or resignation. The amount in your account is managed according to the fixed guidelines by the professional Fund Managers. By default, this option is active in your account when you open the account.
Tier 2: – In Tier 2, you can yourself manage the investment options, you are free to choose your own choice investment scheme options and you can withdraw amount any time before your retirement or resignation. When you opt for Tier 2 option, the Government contribution stops, and you are the sole contributor.
The amount deposited to your accounts every month keeps on allocating to Government Fund Schemes and a small part to Equity. This is done to balance the growth as well as safety of your retirement corpus from market related risks. At the start of the NPS, the Equity allocation is higher which is lowered systematically as the subscriber approaches retirement. The major fund schemes by default are:-
LIC Pension Fund Scheme – State Govt (Scheme I Investment Option I)- (33.00%)
SBI Pension Fund Scheme – State Govt (Scheme I Investment Option I)- (33.00%)
UTI Retirement Solutions Pension Fund Scheme- State Govt (Scheme I Investment Option I)- (34.00%)
The units are allotted for the amount invested and these units keep accumulating in your account. At the time of disbursal, the amount according to the number of units and their Net Asset Values (NAVs) is credited to your account.
Subscriber Shifting in New Pension System
If you change your job and your employer changes or you transfer your job from one State to another, you will need to submit a Subscriber Shifting Form so that your new DDO is attached to your PRAN after unlinking the previous DDO. You don’t need to do this in general transfers where you are simply transferred under the same employer.
Withdrawal from the New Pension System
You can apply for withdrawal by giving application to your Drawing & Disbursing Officer (DDO) who will forward the application to Pay & Account Office (PAO) which sends request to CRA.
In case of Government employees, at the age of 60 Years, the 40% amount is paid as lump sum while for the rest of 60%, a life annuity scheme has to be purchased. This annuity scheme pays monthly pension to the employee till he is alive and thereafter his dependents. At the age of 70 years, whole of the amount is given to the employee and the account is closed.
In case of withdrawal before 60 years, the sum given in lump sum is 20% while life annuity is purchased for 80% of the amount accumulated which gives monthly pension from that annuity.
In case of death of employee, the whole amount is credited to the nominee of that employee.
If you have any point in your mind regarding NPS, we can discuss it here, you are welcome to start the discussion.