A pension may be a "defined benefit plan", where a fixed sum is paid

regularly to a person, or a "defined contribution plan", under which a fixed

sum is invested that then becomes available at retirement age. Laborunions,
the government, or other organisations may also fund pensions. It is true that
even during the early part of the last decade, people used to think and talk
about retirement planning only in their early50s. They had a number of
reasons for that:

➤ The state of the Indian economy during most part of the 20thcentury.

➤ The economy was predictable, stable, smooth, and without shocks.

➤ The feeling that pension is only for government employees.

➤ The lack of awareness on the need of pension and the planning for it.

➤ The inaction of the financial sector in not creating a market for pension
products.

➤ The joint family system and the traditional Indian mentality of taking care
of elders.

➤ The development in the past 10 years changed the scenario drastically.

The youth of this generation experienced the boom and the recession in
the same decade. The roller-coaster ride experienced in the personal and
professional fronts are still fresh in their memories. The advent of new
generation private insurance companies has led to the introduction of a breed
of new pension products. In the modern era, we could see the deterioration of
the joint family system and the emergence of the nuclear family. These factors
have led to some change in the popular approach too. Now, most people want
to start planning for their retirement life in their early 30s or even earlier.

Provident Fund Regulatory Development Authority of India has come

up with a new pension scheme for the citizens of India. It is basically a
retirement plan offered by the Government to the general public. It is the
cheapest form of Pension plan offered to the investors. The Scheme offers two
options to the investors. Tier-1 and Tier-2. In Tier 1, the investor before
attaining 60 years can withdraw only 20% of the

contribution and the rest 80% has to be compulsorily invested in

annuity from a life insurer. After the retirement age of close 60% of the
contribution can be withdrawn and the rest 40% has to be invested in
annuities. Tier-2 is a voluntary savings preference chosen by the investor
wherein there is no limit for withdrawal of money.

Pension funds have grown substantially in the past four decades

majorly due to increased economic prosperity that nudges people to care more
for their future and increased number of people covered under a pension fund
scheme even as the number of schemes themselves has increased.
Significantly positive increments in life expectancy the world over have also
contributed to greater demand for pension products. Moreover, incentives
given by governments in form of tax concessions also have played a crucial
role in increased popularity of pension plans (Pilbara, 2005). Why increased
economic prosperity should enhance the demand for pension products? One
can put forth a proposition that savings for pension is a luxury good, and
hence the income elasticity for this good would be greater than one. This
explains why pension savings grow at a more rapid pace than the income
itself. Apart from these attributes, pension savings in many countries have
been made compulsory and social security contributions are deducted at the
time of disbursements of salary itself (which can be termed as a modified
version of the tax deducted at source (TDS), which also plays a significant role
in enhancing the overall fund size available with the pension funds. Yet
another factor for popularity of pension funds is the portfolio
diversification/professional fund management service offered by them at
reasonable cost due to economies of scale achieved in their operation (Salon,
1992). Proponents of pension plans say that provisioning of such schemes
ends up increasing the net domestic financial savings.
 Pension plans provide financial security and stability during old age
when people don't have a regular source of income. Retirement plan ensures
that people live with pride and without compromising on their standard of
living during advancing years. Pension scheme gives an opportunity to invest
and accumulate savings and get lump sum amount as regular income through
annuity plan on retirement. According to United Nations Population Division
World's life expectancy is expected to reach 75years by2050 from present
level of 65 years. The better health and sanitation conditions in India have
increased the life span. As a result, number of post-retirement years increases.
Thus, rising cost of living, inflation and life expectancy make retirement
planning essential part of today's life. To provide social security to more
citizens the Government of India has started the National Pension System

 CONSIDERATION FOR BUYING PENSION

PLANS

The customers considered investing in voluntary pension plans

primarily due to the perceived security of funds followed by 'efficient service'.
The Trust with the brand name years of experience' and 'easily approachable
aspects of insurance provider were some of the other important factors. Above
70% policyholders of pension products preferred 'security of money',
'retirement benefits', 'tax benefits and 'options of taking pension' as most
important while buying a pension policy. Since the tax benefits are defined by
the Government of India, the customers get the automatic benefit of tax after
buying a pension policy. Of the total pension pay-outs, 1/3rd of the amount is
tax-free whereas 2/3rd of the amount is taxable. It was observed that the
awareness about the tax incentives on contribution and accumulation stage of
pension policy is very low. Eventually, the customers wanted to buy pension
policy to reduce the tax burden. The customers are more concerned about tax
at pay out than accumulation and contribution stage because due to taxation,
the number of pay-outs gets reduced.
  NATIONAL PENSION SCHEME (NPS)

NPS is a social security initiative of the Government of India, which

aims to provide financial cover to the individuals after their retirement. The
government has set up the Pension Fund Regulatory and Development
Authority (PFRDA) as an autonomous body to govern the NPS. The scheme is
being widely promoted by the PFRDA so that people of all classes are
benefited. The contributions made in NPS are invested intoyears by2050 from
present level of 65 years. The better health and sanitation conditions in India
have increased the life span. As a result, number of post-retirement years
increases. Thus, rising cost of living, inflation and life expectancy make
retirement planning essential part of today's life. To provide social security to
more citizens the Government of India has started the National Pension
System

CONSIDERATION FOR BUYING PENSION PLANS

The customers considered investing in voluntary pension plans

primarily due to the perceived security of funds followed by 'efficient service'.
The Trust with the brand name years of experience' and 'easily approachable
aspects of insurance provider were some of the other important factors. Above
70% policyholders of pension products preferred 'security of money',
'retirement benefits', 'tax benefits and 'options of taking pension' as most
important while buying a pension policy. Since the tax benefits are defined by
the Government of India, the customers get the automatic benefit of tax after
buying a pension policy. Of the total pension pay-outs, 1/3rd of the amount is
tax-free whereas 2/3rd of the amount is taxable. It was observed that the
awareness about the tax incentives on contribution and accumulation stage of
pension policy is very low. Eventually, the customers wanted to buy pension
policy to reduce the tax burden. The customers are more concerned about tax
at pay out than accumulation and contribution stage because due to taxation,
the number of pay-outs gets reduced.

+ NATIONAL PENSION SCHEME (NPS)

NPS is a social security initiative of the Government of India, which

aims to provide financial cover to the individuals after their retirement. The
government has set up the Pension Fund Regulatory and Development
Authority (PFRDA) as an autonomous body to govern the NPS. The scheme is
being widely promoted by the PFRDA so that people of all classes are
benefited. The contributions made in NPS are invested into three classes of
funds, namely Equity (E), Fixed Return Instruments (C), and Government
Bonds (G). Individual shave the option to choose the allocation of funds.
However, investment in equities is restricted to 50% of the contribution. While
ensuring that individuals benefit from the equity market, the allocation to
government and fixed return instruments ensure a balance in an
underperforming stock market. NPS has features such as transparent
investment norms, regular monitoring, and performance review of pension
fund managers by NPS trust. An NPS account can be operated from anywhere
in the country irrespective of employment and geography. The PFRDA
recently launched a portal (eNPS) to enable online transactions. New accounts
can be opened with Aadhaar or PAN card, contributions can be made, and fund
performance and status can be tracked online.

Charges and fund management: NPS is perhaps the world's lowest cost
pension scheme and it is one of the keys selling points of the scheme. Though
the fund management fee which is currently fixed at 0.01% may group, the
maximum is capped at 0.10%. On an investment of Rs.1 lakh, the fund
management fee is just Rs.10 a year (max 100 in future), compared to
Rs.1,500- 2,500 charged by mutual funds or unit linked Insurance plans. This
low fee structure will pay a major role during accumulation, considering the
long-term nature of the product. Further, the minimum annual contribution has
been kept a low amount of Rs.1000 per year, with no maximum limit. The
fund is currently managed by notable Fund Managers like LIC, SBI, HDFC,
ICICI, UTI, Reliance, Kotak etc. Which promises optimisation of funds to
ensure better returns to the subscribers, which may not be possible for
individuals to achieve at a personal level.

+ RETURNS GENERATED BY PENSION FUNDS

Another problem could arise due to agency problem. Though the funds
are collected from households (the principals) by pension funds, they are
managed by professional fund managers (the agents), who may very often be a
third party exacerbating the agency problem as such fund managers may not
work in the best interest of original principals being so far away (Klumpes &
McCrae, 1999). In fact, Klumpes andMcCraecite Ippolito and Turner (1987)
who studied the performance of pension fund managers with respect to the
markets they were investing in and also compared the performance of pension
fund managers with performance of equivalent mutual fund managers and
found that that pension fund managers significantly underperformed both the
benchmarks and mutual fund managers (1999: 262).

One of the reasons cited in the paper is that even as pension trusts
appoint reputed fund managers in order to discharge their fiduciary duty to
their members, they are often naïve financially and cannot keep the required
tab on performance of such fund managers, who can take benefit of
information asymmetry arising in such circumstances (1999: 262)

+ NATURE OF PENSION FUND

 There is another matter of differentiating defined benefit (DB) schemes
from defined contribution (DC)schemes. As has been pointed out briefly,
defined benefit schemes that were more popular early on depended on inter-
generational transfer of savings through pay-as-you-go (PAYG) systems.
Retirement income of the previous generation was generated by taxing the
income of the present generation. However, most of the countries (including
India) and indeed institutions such as the World Bank consider such schemes
unsustainable. DB schemes were thought to overburden the exchequer, and
promote unemployment. Moreover, they did not induce the long-term savings
behaviour, and hence could not contribute to development of the capital
market and economic growth in a country (Sadhak, 2004). As against this,
defined contribution schemes are always fully funded and individuals take on
all the responsibility of their retirement by regularly contributing to a scheme,
which would offer annuity income after retirement based on the corpus
accumulated during the working age. Such schemes are expected to promote
savings in individuals, unburden the exchequer and channelize such funds to
productive usage in the economy.

However, defined contribution schemes have also been criticised for

not taking care of unemployed, underemployed, and self-employed (Tuesta,
2011). Moreover, such schemes also transfer the burden of uncertainty to the
individual, who might be lesscapable than the state to deal with any
eventuality. However, a significant benefit of the contributory pension
schemes (i.e. defined contribution plans) is greater availability of individual
savings for investments in domestic capital markets. As has been pointed out
earlier, pension funds have become one of the largest institutional investors in
capital markets in many developed countries-be it the stock markets or the
debt segment.

Tax concessions: Contribution up to Rs.50,000 made toward an NPS

account is
 eligible for an exclusive tax deduction under section 80 CCD (1B).
Further, employees can invest 10% of their basic pay through their employers
to get additional tax rebate under section 80 CCD (2). Thus, while saving for
retirement, additional tax benefits are available which are not available for
other pension plans

Withdrawals: A subscriber of NPS for at least 10 years can conduct

three partial

withdrawals during his subscription period with a gap of at least five

years between two withdrawals. The maximum withdrawal limit is set as 25%
of self- contribution. The purpose of withdrawal can be children's higher
education or marriage, construction/purchase of house, and treatment of
specific critical illness for self, spouse, children, or dependent parents. During
retirement, up to 40% of the corpus built can be withdrawn as lump sum and is
exempted from tax. Individuals have to mandatorily invest 40% of the fund to
purchase pension annuity. The balance 20% can either be invested in annuity
or withdrawn as lump sum. The budget 2017 has come up with a great respite
for those who have invested in National Pension scheme (NPS) Or planning to
invest in it. This is so because now partial withdrawals from NPS will be tax
free. Before this partial withdrawal were taxable. PFRDA (Pension Fund
Regulatory and Development Authority) allows the partial withdrawal from
NPS up to 25% of contribution made by subscriber. However partial
withdrawal is allowed subject to fulfilment of certain conditions as below:

➤ The partial withdrawal shall be allowed for specific purposes such

as higher education of children, marriage of children, purchase or construction
of residential house or for treatment of specified diseases.

Individual should have subscribed to NPS for at least 10 years.

 Maximum of 3 withdrawals during the entire tenure are allowed.

Minimum gap of 5 years is required between the two withdrawals.

However, this condition shall not apply in case of withdrawal for

treatment of specified illness.

LIMIT ON AMOUNT OF WITHDRAWAL: - The maximum amount

which is

allowed to be withdraw is 25% of the contribution made by the

subscriber and not the total amount accumulated in the fund. Suppose you
have invested Rs.6 lakhs in the NPS so far. This is your contribution towards
the scheme. Let's assume if after 11 years the Rs.6 lakhs grow into Rs.14lakhs.
And if you want to withdraw some amount, you will be allowed to withdraw
up to 25% of the contribution which is Rs.6 lakhs and not Rs. 14 lakhs i.c.
25% of 6 lakhs is Rs.1.5 lakhs. This amendment will be effective from
01.04.2017. The partial withdrawals made before 01.04.2017 will be taxable.

+ TAX TREATMENT ON WITHDRAWALS FROM NPS

➤ Withdrawal on retirement/at the age of 60.

➤ Withdrawal up to 40% of the accumulated wealth in NPS is exempt

from tax at the time of retirement. However maximum amount that you can
withdraw at the retirement is 60% of the accumulated wealth and balance 40%
needs to be utilized for the purchase of annuity providing monthly pension to
the subscriber.
 ➤ Withdrawal from NPS before retirement (irrespective of the cause)

If you want to withdraw from NPS before the age of 60 or before

retirement (other than the purpose specified for partial withdrawal), the
amount withdrawn will not be taxable but the amount that can be withdrawn is
limited to only 20% of the accumulated wealth in NPS and balance 80% of the
accumulated pension wealth has to be utilized for purchase of annuity
providing for monthly pension of the subscriber. However, the annuity income
shall be taxable in the year of receipt as per the income tax slab rate applicable
to the subscriber.

➤ Withdrawal upon death of subscriber.

➤ The amount withdrawn in the event of death of subscriber shall be

exempt from tax. The entire accumulated pension would be paid to the legal
heir/nominee of the subscriber. However, in case of government employees,
the entire amount cannot be withdrawn. Purchase of annuity plan is mandatory
by the nominee.

➤ 100% withdrawal at the time of retirement/attaining the age of 60:

In case the total corpus in the account is less than Rs 2 lakhs as on the Date of
Retirement (Government sector)/ attaining the age of 60 (Non-Government
sector), the subscriber (other than Swavalamban subscribers) can avail the
option of complete withdrawal.

+ CHALLENGES FACED BY PEOPLE IN NATIONAL PENSION

SCHEME
 People participating in the National Pension Scheme (NPS) in India
may face several challenges. These challenges can vary based on individual
circumstances, preferences, and the evolving nature of the financial market.
Some common challenges faced by people in the NPS include:

➤ Market Risks: NPS investments are market-linked, and the

performance is subject to market fluctuations. Participants may face
challenges if the market performs poorly, affecting the returns on their
investments.

Volatility in Returns: The returns in NPS are not guaranteed, and they

depend on the performance of the chosen investment options.

Participants may find it challenging to cope with the volatility and uncertainty
associated with market-linked returns.

➤ Limited Awareness: Many people may not be fully aware of the

features, benefits, and investment options available in the NPS. Lack of
awareness can result in individuals making suboptimal choices for their
retirement planning.

➤ Complicated Investment Choices: NPS offers multiple fund choices,

including equity, corporate bonds, and government securities.

Participants may find it challenging to navigate through these options and
choose the most suitable investment strategy based on their risk tolerance and
financial goals.
 ➤ Mandatory Annuity Purchase: Upon retirement, participants are
required to

use at least 40% of the accumulated corpus to purchase an annuity.

Some individuals may find this mandatory annuity purchase restrictive, as it
limits the flexibility of managing their retirement funds.

➤Limited Pension Fund Managers: The number of pension fund

managers

available in the NPS is limited. Participants may face challenges if they

wish to have more options or if they are dissatisfied with the performance of
their chosen fund manager.

Low Liquidity: NPS Tier I account has restrictions on withdrawals

until the age of 60, except in specific circumstances. Participants may find this
lack of liquidity challenging, especially during financial emergencies.

Long Lock-In Period: NPS is a long-term retirement savings scheme

with a lock-in period until the age of 60. Participants may face challenges if
they need access to their funds for unforeseen circumstances or if they prefer
more flexibility in managing their savings.

Limited Emplover Support: Some employers may not actively promote

or

contribute to the NPS on behalf of their employees. Limited employer

support can result in lower participation and awareness among potential
subscribers.
 Tax Implications: While contributions to NPS offer tax benefits, the tax
treatment of withdrawals and annuity income can be complex. Participants
may find it challenging to navigate the tax implications associated with NPS.

It's essential for individuals to carefully consider these challenges, seek

professional advice if needed, and make informed decisions based on their
financial goals and circumstances when participating in the National Pension
Scheme in India.

+ CHARGES

All the charges associated to Tier I account including Annual PRA

Maintenance charge are paid by the employer. In case of Tier II account,
activation charge and transaction charges are paid by the subscriber.

The POP charges and the CRA charges are given in the table below:

Intermediary Charge head Service charges Method of

Deduction
CRA PRA Rs.50 Through
Opening charges cancellation of units
at the end of each
quarter

Annual Rs.190
PRA Maintenance
cost per account

Charge per Rs.4

transaction

POP Initial Rs.100 To be

(Maximum subscriber collected upfront
Permissible registration
charge for each
subscriber)
 Initial 0.25% of
contribution the initial
upload contribution
amount from

subscribe
r subject to a
minimum of
Rs.20 and a
maximum of
Rs.25,000/-

Any 0.25% of
subsequent the amount
transaction subscribed by the
involving NPS subscriber,
contribution subject to
upload minimum of
Rs.20/- and a
maximum of
Rs.25000/-

Any other Rs.20

transaction not
involving a
contribution from
subscriber