guaranteed pension
Future security and a comfortable retirement are the biggest dreams of every working person and business person. But a big challenge often comes in the way of this dream – inflation. Will the savings you are saving today be enough to meet your needs after 20 years? To ensure this, preparations are being made for a major change in the National Pension System (NPS). The Pension Fund Regulatory and Development Authority (PFRDA) has released a consultation paper, the aim of which is to change NPS from just a ‘savings plan’ to a ‘guaranteed pension system’.
What is the current challenge of NPS?
National Pension System (NPS) It was started in 2004 for government employees and in 2009 it was opened to all Indian citizens. Over the years, it has attracted a strong base of investors due to its excellent returns and tax savings. But, its biggest shortcoming is that it does not guarantee any ‘fixed’ or ‘predictable’ pension after retirement.
In the current system, your money is invested in the market and the returns depend on it. On retirement, you get a lump sum and use the rest to buy an annuity plan, which gives you pension.
Proposition 1: A mixed model of flexibility and growth
Among the new ideas introduced by the regulator, the first model is for those who want some flexibility. This model combines a systematic withdrawal plan (SWP) with an annuity.
In this system, there will be no direct guarantee of pension amount or benefits, but investors will be able to estimate their pension on the basis of a fixed calculation. A minimum contribution of 20 years will be required for this plan. Investment strategy has also been decided, under which 50% of the money will be invested in equity (stock market) till the age of 45 years and after that it will be gradually reduced.
Upon retirement, the investor will initially be given 4.5% of his annuity fund monthly through SWP. There will also be an increase of 0.25% every year for 10 years. When the investor turns 70, the remaining amount will be used to purchase an annuity for a period of 20 years and thereafter for life.
Proposal 2: ‘Fixed’ pension that beats inflation
The second model is considered to be the most revolutionary. This is for those investors who want to get a fixed pension every month and that pension also keeps increasing according to inflation.
This plan will decide the amount of pension the customers will receive in the first year after retirement. After this, every year your pension will be increased on the basis of Consumer Price Index (CPI-IW) i.e. inflation rate. This means that if inflation increases, your pension will also increase, which will not put a burden on your pocket. Contribution of 20 years will be mandatory for this scheme also.
To meet this guarantee, the fund will be divided into two parts. The first part, which will give you a fixed pension, will be invested in safe options like government securities and high-rated bonds. For the second part, which will increase the pension according to inflation, up to 25% of the amount will be invested in equity to get higher returns.