Note that unlike the old pension scheme, which was based on the last pay drawn by the employee, NPS is a defined contribution plan in which both the employee and employer contributes to build a pension corpus
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Key Highlights
- Government has appointed three Pension Fund Managers (PFMs) – SBI Pension Funds Pvt Ltd, UTI Retirement Solutions and LIC Pension Fund to manage contributions by the government employees
- The pension fund managers have been instructed that fixed income securities should constitute a minimum of 85 per cent of their investment
New Delhi: National Pension System is a government pension scheme in which a government employee contributes towards pension from monthly salary along with matching contribution from the employer. The funds are then invested in earmarked investment schemes through Pension Fund Managers. All employees joining services of the central government, including central autonomous bodies (except Armed Forces) on or after 2004, are covered by NPS.
Note that unlike the old pension scheme, which was based on the last pay drawn by the employee, NPS is a defined contribution plan in which both the employee and employer contributes to building a pension corpus payable at the time of retirement, premature exit or death in the form of an annuity and lump sum withdrawal.
In the case of government employees, the central government contributes an equal amount matching to the contribution of the employee to his account. So, if an employee contributes Rs 2,000 every month to the scheme, the government will also contribute a matching amount of Rs 2,000 to the employee's account. One can build a retirement corpus of Rs 50 lakh with a contribution of just Rs 2,000 every month.
For example, if a government employee starts contributing Rs 2,000 every month in NPS at the age of 30, the total monthly contribution to the account will be Rs 4,000 (including that of the government). At an expected 8 per cent rate of return, this amount will result in a corpus of over Rs 50 lakh in 30 years, till the age of retirement at 60. By buying an annuity plan with this amount, the subscriber can get a monthly pension of Rs 26,000 per month.
It is worth mentioning that the government has appointed three Pension Fund Managers (PFMs) – SBI Pension Funds Pvt Ltd, UTI Retirement Solutions and LIC Pension Fund to manage contributions by the government employees. These fund managers invest the government employee’s contribution in a pre-determined ratio. Total monthly contribution in an employee’s NPS account is distributed among the three PFMs in a pre-determined ratio for investment. The pension fund managers have been instructed that fixed income securities should constitute a minimum of 85 per cent of their investment. These include government securities, corporate bonds etc. And, they can invest a maximum of 15 per cent in equity and equity-related investments.
NPS official website says, "As per the present guidelines of Pension Fund Regulatory and Development Authority(PFRDA), contribution towards pension will be invested in the default schemes of three Pension Fund Managers (PFMs), viz, LIC Pension Fund Limited, SBI Pension Funds Pvt. Limited and UTI Retirement Solutions Limited in a predefined proportion, which is mentioned in the Statement of Transaction. Each of the PFMs will invest the funds in the proportion of 85% in fixed income instruments and 15% in equity and equity-linked mutual funds."
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