Understanding the Pension Landscape in India
Pension plans provide financial security and stability during old age when people do not have a regular source of income. Retirement plans ensure that people live with pride and without compromising their standard of living during their old age.
Pension schemes are more than just an employee benefit scheme in India. Pension payment accounts for a substantial portion of the government’s spending that they collect from taxes. For years, India has witnessed a debate around the OPS and the NPS. However, the technicalities are not that simple.
In this blog let us try to decode what OPS(Old Pension Scheme) and NPS( National Pension Scheme) mean exactly, which is a better plan to have in the country and how it can benefit you as an investor to know about the details of these plans. With this, we will be able to look at the current retirement landscape of India.
A timeline of pension schemes in India
Like many of the first things that the British introduced to India, the pension system was one of them. The tradition of providing pensions to retired employees dates back to Colonial India, with its roots tracing back to 1881.
OPS (Old Pension Scheme) has its historical origins in the British colonial era when the Royal Commission, known as the Lee Commission, in 1924, recommended that half of an employee’s salary during their active service should be granted as a pension after their retirement for individuals serving in India.
On January 1, 2004, India’s then PM, Shri Atal Bihari Vajpayee announced the National Pension Scheme (NPS). Since May 2009, the NPS has also covered many individuals who are self-employed or work in the “unorganised sector”.
What is the Old Pension Scheme?
The Old Pension Scheme guarantees a stable income after retirement. In this scheme, employees receive a pension equivalent to 50% of their final salary. They also benefit from a biannual dearness allowance. The pension payout remains consistent, with no deductions
from the salary.
Let us understand the old pension scheme with an example:
Mr A’s salary at the time of his retirement was Rs 50,000. As per the OPS, he is assured a pension of Rs 25,000, which amounts to 50% of his last drawn salary. Mr A is also eligible to receive a dearness allowance, which is a percentage of his fixed pension. In this case, with a dearness allowance of 2%, he receives an additional Rs 500 on top of his pension.
The government is obligated to pay this pension to government employees as promised, regardless of the state of the economy.
The economic challenge with OPS is that a substantial portion of the government’s income, which comprises tax revenue collected from ordinary citizens, is allocated to meet these pension obligations.
What is the NPS scheme?
Due to the heavy economic burden on state and central governments, the old pension scheme was abolished and a new scheme, known as the National Pension Scheme or NPS was introduced.
The NPS was launched on January 1, 2004, with the primary objective of providing retirement income security to all citizens. Initially, NPS was exclusively available to new government recruits, excluding the armed forces. However, starting on May 1, 2009, the
NPS was extended to encompass all citizens of the country.
The scheme encourages individuals to invest systematically in a pension account throughout their employment tenure. Upon retirement, subscribers can withdraw a portion of the accumulated corpus, while the remaining amount is disbursed as a monthly pension, offering financial security in their retirement years.
Let us understand how NPS is different from the OPS with an example:
Consider Mr. A, whose monthly salary is Rs 25,000. In the NPS scheme, the employee and the employer can contribute 10% of Mr A’s salary to a pension fund. These contributions are subsequently invested in various financial instruments like corporate bonds, government bonds, and equities. Professional pension fund managers, such as SBI, LIC, Axis, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max Life, oversee and manage these pension funds.
NPS operates as a government-monitored portfolio management service. Mr. A’s retirement corpus grows alongside his salary increments. Upon retirement, he has the option to withdraw 60% of this accumulated amount. The remaining portion of the corpus can be utilised as annuities, providing a steady income stream during his retirement years.
Here are the top 3 reasons why NPS benefits the Indian landscape:
- NPS allows employers and employees to invest a percentage of their salary in the scheme. Investing in NPS incentivises employers and employees by providing tax savings and enabling them to plan for a more secure retirement in the future.
- The increase in pension funds has led to an infusion of capital into various new businesses, ultimately contributing to economic growth.
- Unlike OPS, NPS does not burden the government with the responsibility of paying a fixed pension amount. Investors receive pensions based on the market performance of the economy.
The current landscape of retired individuals in India
The percentage of people aged above 60 years is only 8.6%, but in absolute terms, they constitute more than 10.4 crore individuals. Crossing 60 years does not mean that Indians retire from work. Census 2011 data shows that for every five persons aged above 60 years, more than two are still working.
Traditionally, Indians were dependent on their children for retirement support. However, this trend is slowly evolving with the growth of retirement communities across India. These are residential communities designed for elderly couples, featuring modern and spacious facilities with safety features such as anti-skid floor tiles, call buttons, and doctors on standby in case of emergencies.
With the increasing popularity of financial influencers and fintech companies, many Indians are becoming aware of money management practices, and retirement planning has gained more prominence over the last 5-10 years. Given this awareness, we can expect the current generation to lead a very fulfilling and happy retirement.
There are multiple approaches to strategies and navigate your life after retirement. Saving your funds in the NPS can prove to be a goldmine during retirement years.
If you feel intimidated by words like retirement or saving and if you feel that you are too late, it’s alright to feel this way. It is better late than never. Give us a call today to help you get started on your financial planning journey. You can even download our app that will assist you in navigating your financial journey step by step, starting from planning an emergency fund to building a retirement corpus.
Many retirees find themselves pondering over how to make the most of their retirement years. Ensuring you have saved enough funds to support the duration of your retirement is of key importance when it comes to retirement planning.
Focusing on maintaining good health and actively socializing can significantly reduce stress, leading to a more relaxed and enjoyable retirement experience.