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Employees contribute 10% of their salary, while the government adds 14% into their NPS accounts. (Representative/File Photo)
The government’s rationale is that NPS is designed as a pension scheme to ensure financial security in retirement.
Since the introduction of the New Pension Scheme (NPS) in 2004, replacing the old pension system (OPS), confusion and skepticism have persisted among employees. A common concern involves the 40% of retirement funds used to purchase an annuity under the NPS. Many employees mistakenly believe that this portion of their money is not returned, raising doubts about the scheme’s benefits.
The NPS is structured with a clear pension system. Employees contribute 10% of their salary, while the government adds 14% into their NPS accounts. These funds are invested across various options, including the stock market. Upon retirement, 60% of the accumulated corpus is returned as a lump sum, while the remaining 40% is used to purchase an annuity. This annuity provides a monthly pension based on the interest earned.
How Does the Annuity Work?
For instance, if an employee retires with a total corpus of Rs 3 crore, 60% (Rs 1.80 crore) is given as a lump sum. The remaining 40% (Rs 1.20 crore) is used to buy an annuity. With an assumed annual interest rate of 6%, this translates to a monthly pension of Rs 60,000. However, the question remains whether this Rs 1.20 crore can be returned in a lump sum.
Why Is 40% Not Given as a Lump Sum?
The government’s rationale is that NPS is designed as a pension scheme to ensure financial security in retirement. Therefore, instead of a lump sum, the 40% is used to purchase an annuity to provide a steady pension. This approach aims to secure the retiree’s financial future through a reliable monthly income.
Is the 40% Annuity Money Ever Returned?
According to Dr Anandvir Singh, state advisor of the UP Teachers Association (ATETWA), the 40% annuity amount is indeed returned, but with specific conditions. This money is not given to the retiree or their nominee while they are alive, as they receive pension payments instead. However, if both the retiree and their nominee pass away, the remaining 40% is paid out as a lump sum to their heirs.
In conclusion, the 40% invested in annuities under the NPS is not retained by the government. Instead, it is returned to the retiree’s heirs under the stipulated conditions, though the process may seem complex and contribute to ongoing confusion among employees.
