Decoding the fine print of pension schemes: What's good, bad, avoidable

By Kavya Dubey
As Karnataka gears up for the upcoming Assembly elections, poll promises by the grand old party include a slew of public welfare measures. The Congress' road map for the impending elections, among other things like quota hike and repealing "unjust laws" made by the government, assures the return of the Old Pension Scheme (OPS) within a year of helming the government.

The Karnataka Congress' manifesto states that it will "sympathetically consider the extension of OPS to government servants that got inducted from 2006 onwards."

Before delving into the details of the OPS, it is interesting to note that the alternate national party insists on the restoration of the older scheme against the New Pension Scheme (NPS).

Last year, the Congress government in Himachal Pradesh kept its promise in this regard, which it made before the Assembly elections. The northern state approved the restoration of OPS in its very first Cabinet meeting held earlier this year.

There are about 1.36 lakh employees including pensioners under the New Pension Scheme (NPS) in Himachal Pradesh.

However, as far as the Congress' campaign in Himachal Pradesh went, it indicated that the party had gained significantly from promising to restore OPS.

While the OPS plank did not outrightly win Congress the Himachal election, it did give the party a last-mile advantage. But certainly, the promise of restoration of OPS makes an impact on government employees and their families, and even young voters aspiring for a government job.

Coming to the understanding of the NPS and how it differs from the OPS, it is fundamentally a change in the pension system introduced by the two rival national parties.

The National Pension System came into effect in 2004 after the Congress government introduced it in 2003. This claims to provide a defined contribution of pension for Indian citizens. The NPS was launched as an alternative with the purpose of providing a secure and stable retirement income.

A fundamental difference between the NPS and OPS is the extent of guaranteed pension provided to the beneficiary. The NPS provides no guaranteed pension, but OPS does, based on the individual's last drawn salary and the number of years of service. For those looking for a guaranteed pension in their retirement, OPS is a more secure and stable method.

While OPS is open to government employees who have completed at least 10 years of service, NPS is open to all citizens of India between the ages of 18 and 60, and the pension received is based on the investment made by the person, and in turn, the returns generated by the pension funds. This scheme also provides for a life insurance cover of Rs 5 lakh for the subscriber.

Further, with respect to contribution, the NPS is more flexible than the OPS as under the former, one can choose to invest in a variety of pension funds, unlike in OPS, which is exclusively salary and service-period based.

Up to 14 per cent of the basic salary of a government employee and up to 10 per cent for the private sector employee can contribute for NPS. It is an advantage for an investor as this is over and above the 80C section of Rs 1.5 lakh.

Here, a Tier-2 account is not compulsory unlike the Tier-1 account where one gets tax benefits. Tier-2 can be treated like an investment which one can exit during the course of investment. The primary objective of Tier-1 is a long-term investment with tax savings, whereas for Tier-2, it is an investment.

After 60, one is free to withdraw up to 60 per cent of withdrawal could be upfront and remaining could be converted into annuity. Additionally, as a benefit, one may choose their annuity partner.

At present, there happen to be eight different pension funds that provide the option of annuity.

The NPS sets forth two options before the investor: an active choice where a subscriber can decide the extent of his participation in equity and corporate debt one can invest up to 75 per cent into equity and remaining could go into corporate debt/government security; and the second option for those preferring a predefined automated system whereby depending on one's age, the asset allocation moves between equity and debt.

Considering which option is better, it depends on the risk-taking ability of the investor.