scorecardresearchOld pension scheme versus NPS: Some key differences

Old pension scheme versus NPS: Some key differences

Updated: 01 Oct 2022, 09:30 AM IST
TL;DR.
In old pension scheme, subscribers used to get a minimum assured amount without having to contribute a dime, whereas in NPS — subscribers are meant to contribute for their future security. Read further to know more on the key differences between the two
It appears that the winds of change are blowing with Rajasthan, Chhattisgarh and Jharkhand already rolled out the old pension plan. The latest addition to the list could be Punjab. 

It appears that the winds of change are blowing with Rajasthan, Chhattisgarh and Jharkhand already rolled out the old pension plan. The latest addition to the list could be Punjab. 

Lately, three states have turned  the wheel back by moving to the old pension scheme after abandoning the National Pension System (NPS). It started with Rajasthan, followed by Chhattisgarh and Jharkhand.

In the old pension system, employees did not contribute anything to their retirement kitty and they were given a monthly pension after they retired. However, from April 1, 2004, all government employees who retired were migrated to the market-linked National Pension System (NPS).

This was done to create and put in place a sustainable model of giving out pensions wherein subscribers are made to contribute for the security of their future.

The rationale was simple. In the former, governments (Union and states) were giving money from their coffers, whereas in the latter — the pension corpus is accumulated over time via contribution given by subscribers.

Although NPS was launched for government employees, private sector employees were also allowed to contribute to it from December 2011.

But now it appears that the winds of change are blowing again with Rajasthan, Chhattisgarh and Jharkhand already rolled out the old pension plan. The latest addition to the list could be Punjab.

Here we share the key distinctions between the two:

1. Contribution: In the old pension scheme, subscribers did not need to contribute anything for receiving pension amount at the end of their service tenure. On the other hand, NPS subscribers contribute 10 percent of their basic salary and the employer can contribute up to 14 percent. The contribution is, thus, invested in a host of investment instruments such as bonds, equity and corporate debt. The accumulated sum is then given back to subscribers in form of annuity and lumpsum.

2. Sum assured: In the old pension scheme, each employee was given 50 percent of basic pay or an average of their last ten years of income – whichever is higher. In the NPS, what is given to subscriber is a function of contribution made, and returns generated on them and tenure for which contribution is given.

3. Coverage: Old pension scheme was applicable for all subscribers – state government employees and central government employees. NPS is applicable to all government employees and some private sector employees too, purely on a voluntary basis.

4. What is better? Well, the question of choosing one over the other does not arise here because it is the mandate of the employer (government in this case) to decide whether employees can choose NPS or old pension scheme. On the top of this, since the old scheme does not require any contribution from the employees, it is a no brainer that employees would invariably choose this over the NPS given a chance.

However, one might argue that the states which are embracing the old system are choosing populism over a sustainable model of financing the future security of their workforce.

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It is recommended to first allocate money to savings every month before spending.  
First Published: 01 Oct 2022, 09:30 AM IST