NEW PENSION SCHEME (NPS)

New Pension Scheme (NPS) is a defined contribution based pension system

launched by Government of India with effect from 1 January, 2004. Like most
other developing countries, India does not have a universal social security system
to protect the elderly against economic deprivation. As a first step towards
instituting pension reforms, Government of India moved from a defined benefit
pension to a defined contribution based pension system. Apart from offering wide
gamut of investment options to employees, this scheme would help government of
India to reduce its pension liabilities. Unlike existing pension fund of Government
of India that offered assured benefits, NPS has defined contribution and individuals
can decide where to invest their money. The scheme is structured into two tiers:
• Tier-I account: This NPS account doesn’t allow premature
withdrawal and is available from 1 May, 2009
• Tier-II account: The tier-II NPS account permits withdrawal,
however is likely to be functional by about 2009 end. The
notification from the regulator Pension Fund Regulatory and
Development Authority (PFRDA) is expected shortly.
Since 1 April, 2008, the pension contributions of Central Government employees
covered by the New Pension System (NPS) are being invested by professional
Pension Fund Managers in line with investment guidelines of Government
applicable to non-Government Provident Funds. A majority of State Governments
have also shifted to the defined contribution based new pension system from
varying dates. 22 State/UT Governments have notified the NPS for their new
employees. Of these, 6 states have already signed agreements with the
intermediaries of the NPS architecture appointed by PFRDA for carrying forward
the implementation of the New Pension System. The other States are in the process
of finalization of documentation.
From May 1, Indians have access to another investment avenue to plan for
retirement in the New Pension Scheme (NPS).
The scheme has been in the pipeline for at least five years but it finally took shape
in 2007-08. Although the government was pushing for the scheme after a law
providing statutory backing to the regulator was enacted, the Left parties, which
were supporting the United Progressive Alliance government, did not allow the
passage of the Bill.
Who can join the New Pension Scheme?
Any Indian citizen between 18 and 55 years. At present, only tier-I of the scheme,
involving a contribution to a non-withdrawal account, is open.
Subsequently tier-II accounts, which permit voluntary savings that can be
withdrawn at any point of time, can be opened. But to be eligible to open a tier-II
account, you need a tier-I account.
How much can I invest?
There is no investment ceiling. But the minimum investment limit has been fixed
at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at
least once a quarter but there is no ceiling on how many times you invest during
the year.
What is the penalty for failure to make the minimum
payment?
You will have to bear a penalty of Rs 100 per year of default and will need to pay
it with the minimum amount to reactivate the account. Also, dormant accounts will
be closed when the account value falls to zero.
What is the default option?
The default option, called auto choice lifecycle fund, will see the investment mix
change according to the age of the subscriber. At the lowest entry age of 18 years,
auto choice entails an investment of 50 per cent in E, 30 per cent in C and 20 per
cent in G.
The ratios will remain unchanged till the subscriber turns 36, when the ratio of
investment in E and C will decrease annually, while the proportion of G rises.
By the time the subscriber is 55 years, G will account for 80 per cent of the corpus,
while the share of E and C will fall to 10 per cent each.

Who will decide the fund manager?

At the moment, the Pension Fund Regulatory and Development Authority
(PFRDA) has selected six fund managers -- State Bank of India, UTI, ICICI
Prudential, Kotak Mahindra, IDFC and Reliance -- on the basis of a bidding and
technical evaluation process.
You have to select one fund manager at the time of deciding your investment
option; later, PFRDA may allow subscribers to choose more than one fund
manager.
Why the New Pension Scheme is best for you
 After much delay and several near misses, we finally have a pension plan; a social security
scheme for 89 per cent of India's workforce that doesn't have a formal retirement solution.
The New Pension System (NPS), as it is now referred to, was fittingly launched on Labour Day,
1 May. Though there are some concerns, such as its taxability, NPS is superbly designed to help
you save for your retirement. We feel it merits a place in your portfolio.
The only question that remains is: just when should you sign up for NPS? Find out. . .

TOP UNIT-LINKED PENSION PLANS

Charges (%) Returns (%)2

Insurer Plan FMC 1st 2nd 1-year

year1 year1

Kotak Life Kotak Retirement Income 1.60 13.12 2.80 64.20

SBI [ Get Quote ] Life Unit Plus II Pension 1.50 15.00 7.50 60.44

MetLife Met Advantage Plus 1.75 20.00 2.00 53.83

ICICI [ Get Quote ] LifeTime Super Pension 1.50 14.00 9.00 51.77
Prudential

HDFC [ Get Quote ] HDFC Unit-Linked Pension 0.80 25.00 25.00 44.36
Standard

Bajaj [ Images ] Allianz New UnitGain Easy Pension 1.75 16.00 2.00 42.67
Plus

Only plans with a one-year track record of equity fund of up to 100% in equities have been considered

FMC: Fund 1Premium allocation 2Coumpunded and annualized as on 31 Mar

management charge charge as % of annual 2007, BSE Sensex returns over the period
premium was 53.04%. Source OLM Research

Pension plan details

Sum
assured Tenure Annual Maturity amt Maturity amt
Age (Yrs) (Rs) (Yrs) premium (Rs) (@6%) (Rs) (@10%) (Rs)

30 500,000 30 13,500 960,000 1,590,500

Actual rate of return (%) 5.10 7.80

 Annuity amt (Rs) 71,500 118,500

Let us take an individual aged 30 years who wants to buy a pension plan with a
sum assured of Rs 500,000 for a 30-year tenure. The premium to be paid for the
same is approximately Rs 13,500. In case of an eventuality, the beneficiary will
stand to get the sum assured of Rs 500,000 plus the bonuses/additions, if any.

In case the individual survives the tenure, he will stand to benefit to the tune of the
maturity amount as indicated in the table below. Assuming that he buys an annuity
for life, the annual amount he would get as pension would be approximately Rs
71,500 (on Rs 960,000) or Rs 118,500 (on Rs 15,90,500). The option of receiving
monthly/quarterly/half-yearly pension is available with most life insurance
companies.

However, the returns shown at 6% and 10% are not calculated on the premium
paid. They are calculated after deducting expenses from the premium. The actual
compounded annual growth rate (CAGR) on the premium works out to
approximately 5.10% (for the 6% figure) or 7.80% (for the 10% figure).

Pension plans comparison table

LIC [ Get
Bajaj [ Quote ] HDFC [ Get
ICICI [ Get Images ] (Jeevan Quote ]
Quote ] Allianz Suraksha/ Personal
Prudential Tata AIG (Swarna Jeevan LIC (Jeevan Pension
(ForeverLife) (Nirvana) Vishranti) Dhara) Nidhi) Plan

Regular Regular Regular Regular

Regular pension pension Regular pension pension
Product type pension plan plan plan pension plan plan plan

Minimum
annual
premium (Rs) 6,000 - 5,000 2,500 3,000 2,400

Minimum cover
(Rs) 50,000 50,000 50,000 50,000 50,000 -

Min-Max. 5 yrs - 35 10 yrs - 40

tenure (Yrs) 5 yrs - 30 yrs - 5 yrs- 40 yrs 2 yrs - 35 yrs yrs yrs
 18-65 (for
Jeevan
Dhara); 18-70
Min/Max Age at (for Jeevan
entry (Yrs) 20-60 18-55 18-65 Suraksha) 18-65 18-60

Min-Max
vesting age
(Yrs) 50-70 50-65 45-70 50-79 40-75 50-70

Term cover,
Critical
illness
cover, Accidental
Hospital death and
cash disability
benefit, benefit
Critical Term rider, Accident rider, Term
illness rider, Critical benefit, Term assurance
Accident and illness rider, Family assurance rider,
Riders disability Accident income rider, Critical Critical
available benefit rider rider benefit illness rider illness rider No

Life cover
available Yes - Yes Yes Yes -

SBI PENSION SEHEME

We at SBI Life understand the basic needs for pension plan and give you financial
strength to maintain your life style even after the retirement. SBI Life - Unit Plus II
Pension plan makes sure that you have regular income after you retire and also
helps you to maintain your standard of living.
This is a unit linked pension plan wherein the policyholder chooses an investment
period from 5 to 52 years for a vesting age between 50 to 70 years. You can choose
to pay either single premium or pay regular premium for the entire policy term.
Your contributions are invested into 5 fund options as per your choice.
Key Features:
Choice to invest & control four different funds as per your risk appetite.
Flexibility to choose between two options
. Pure Pension
 . Pension cum Life Cover
No medical required for Pure Pension, automatic acceptance facility.
Flexibility to increase regular contribution.
Top up payments: any amount, anytime
. Customize your plan by adding riders.
15 days free look period. Product type: This is a non participating Unit
Linked Pension product. How does it work?
Choose your vesting age: Any age between 50 years - 70 years.
Choose premium frequency and premium amount

Premium Minimum frequency Maximum

Frequency Frequency
Single 25,000(in multiples of 1000) No Limit
Yearly 24,000(in multiples of 100) No Limit
Half Yearly 12,000(in multiples of 100) No Limit
Quarterly 6,000(in multiples of 100) No Limit
Monthly 2,000(in multiples of 100) No Limit

Choose plan option Option I Pure Pension Plan (For age group 18-65)
Option II Pension Plan with life cover (For age group 18-60) I n case you have
opted for option II, your sum assured will be as mentioned below
For single premium mode
 Age at Sum Assured
entry
18-35 125 % of single premium subject to maximum SA
of Rs. 10 lacs
36-45 125 % of single premium subject to maximum SA
of Rs. 5lacs
46-60 125 % of single premium subject to maximum SA
of Rs. 1.2 lacs

Choose your investment funds: You can invest in 5 investment funds viz.
Equity Pension Fund, Bond Pension Fund, Growth Pension Fund, Balanced
Pension Fund and Equity Optimiser Fund Benefits

For regular premium mode

Age at Sum Assured
entry
18-35 5 or 10 times first annualised premium subject to
maximum SA of Rs. 10 Lacs
36-45 5 or 10 times first annualised premium subject to
maximum SA of Rs. 5 Lacs
46-60 1.2 lacs
 Death Benefit: During accumulation phase
 If you opt for option I : Pure Pension Plan Fund value will be paid in lumpsum
to nominee.
 If you opt for option I : Pure Pension Plan with life cover The higher of fund
value or sum assured will be paid in lumpsum to nominee.
Guaranteed additions by way of free allocation of units to increase your
retirement kitty.
On Vesting: It’s your income; you decide how it works for you. You have
choice and flexibility.You can take upto one third of the fund value in lumpsum.
tax-free as per current tax law. The tax free limit applicable for the commutated
value may change as per change in Income Tax rules During Annuity Phase:
Balance amount has to be used to purchase annuity. The rate at which the amount
at vesting date will be converted to an annuity is not guaranteed and will be based
on the prevailing immediate anniuty rates under the relevant annuity option at the
vesting date. Currently SBI Life Insurance offers the following annuity options.
 Life annuity at constant rate.
 Annuity payable at constant rate throughout the life of Annuitant with facility
of receiving on death of Annuitant refund of purchase price less the sum total of
annuity already paid till date of death.
 Annuity payable at constant rate throughout the life of Annuitant with facility
of receiving on death of Annuitant 100% refund of purchase price.
 Annuity increasing at the simple rate of 1%, 2% or 3% per annum as the case
may be and payable during the life of the Annuitant.
 Annuity certain for 5/10/15 years as the case may be and for life thereafter.
 Last survivor annuity, whereby upon the death of Annuitant his / her spouse
will receive a life annuity, which will be either 50% or 100% of the last annuity
amount paid to the Annuitant, as selected. This annuity option will not be available
if the difference in the age of annuitant and spouse is more than 10 years. Tax
Benefits Save tax u/s 80 CCC (1) of IT Act. What is the policy term?
Term = Vesting Age - Age at Entry
Minimum Years Maximum Years
5 Years 52 Years
Who can buy this product? If you are in the age group of 18 to 65 you can opt for
SBI Life - Unit Plus II pension plan without life cover. For Unit Plus II pension
plan with life cover it should be between 18-60 years. Riders available
• SBI Life - Accidental Death and Total Permanent Disability Rider
• SBI Life - Critical Illness Rider
You can invest in the following investment funds viz. Equity Pension Fund, Bond
Pension Fund, Growth Pension Fund, Balanced Pension Fund and Equity
Optimiser Fund

ASSIGNMENT ON INSURANCE
BY
ARUNA KUMAR SUTAR

INTERNATIONAL INSTITUTE
OF
BUSINESS STUDIES
NEW PENSION SCHEME (NPS)