Tuesday, August 11, 2020

Comparision of 3 retirement benefits

 Highlights/comparison of 3 types of retirement benefits:

(Each of the schemes has its own plus and minus factors)

1. Contributory P.F. Scheme:

*Bank will contribute 10 % of Basic Pay towards P.F account .

Employee will also contribute 10%

*Funds will be managed by respective Banks themselves.

Bank in turn will invest the money as per Govt. guidelines.

Interest/Income earned will be distributed to employees.

Return is around 8%.

*At the time of retirement at 60 years Bank will pay the accumulated sum along with interest to employee.

* If employee leaves the job before 5 years of service , Banks contribution will not be paid. Those who switch job within 5 years will get nothing.

* If the employee leaves the job after 5 years, accumulated amount along with interest will be given to the employee.

* Similarly any employee dies during service, the accumulated amount will be given to the spouse / successor.

If employee died in younger age his family will get meagre amount only, as accumulation will be less.

* Since lump sum amount is given at the time of retirement, it is difficult for some employees to invest prudently and earn returns. Also, one may have to give money to his kith and kin for their needs, thereby loosing the principle amount and regular income for his livelihood.

*A special Assistant after 35 years of service retiring this month Aug 2020 is getting 

Rs.18,00,000 +Rs.18,00,000

as P.F. accumulation by employee and employer under this scheme.

2. Defined Pension Scheme:

*Instead of contributing to P.F. through out the service of the employee, Bank will start giving Pension after employee retires or on death.

*Pension will be based on the Basic Pay drawn at the time of retirement based on a fixed formula.

Hence amount of Pension is pre determined or guaranteed.

*Computation, i.e. encasing a portion of Basic Pension in advance . Of course at a discounted rate.

By opting for computation, employee will get a lump sum, and can utilise it for his family commitment.

Moreover employee will get regular monthly income by way of Pension.

Pension amount will increase as and when D.A. increases.

*After death of the employee during service, Bank will give only Family Pension to the spouse, which is much less than the Pension of employee.

Spouse will not get any lump sum, as computing facility is not there for family pensioner.

In this situation , Bank gains and employee/spouse looses.

* To match P.F. contribution by Bank in contributory P.F scheme, by getting Pension, employee should live up to around 65 years.

i.e. benefit of Defined Pension scheme over Contributory P.F depends on the life time of the employee.

*If an employee want to take VRS, minimum 20 years of service is required.

Those who want to change/switch job before 20 years ,say 15 years, will not get single rupee from Bank. 

Only amount contributed by employee will be paid with accumulated interest. 

*A special Assistant after 35 years of service retiring this month Aug 2020 is getting 


as P.F. accumulation by employee.

Rs.10,00,000 as computation.

Rs.31000 as Pension per month.

3. New Pension Scheme:

It is a combination of Contributory P.F. and Defined Pension scheme.

* Bank wil contribute 14% on Basic Pay plus D.A., (10% on Basic Pay only in Contributory P.F. system.)

Employee's contribution will be 10% only on Basic pay plus D.A .

Example: Basic pay =Rs.100

D.A =Rs. 77.5

Old contribution at 10% will be Rs.17.75 +17.75=35.5 by employee and Bank.

New revised contribution in new pension scheme will be Rs.17.75+24.85

(14% of 177.5)=42.60

In contributory P.F. scheme , 10% each by both employee and Bank on Rs.100 will be Rs.20 only.

Therefore corpus acrued in NPS at the time of retirement will be higher by 2.13 times of Contributary P.F. scheme.

* Every month contribution by employee as well as employer will be transfered to Pension Fund chosen by the Bank.

Pension fund will invest the money in equity/Govt. Bonds/debt instruments as per guidelines.

Returns on investment is not guaranteed and depend on market fluctuations. 

Experience so far is, returns are  around 9% to 10%.by LIC, SBI,UTI Pension funds.

*Out of total corpus amount, 60% will be paid to employee.

(Like employee's PF+computation of pension).

40% of corpus will be utilised for buying annuity.

i.e. to pay Pension .

Here , return from corpus of 40% will be paid as pension, and the corpus amount 40% will remain in employees account only.

*On death of the employee entire corpus standing at that time will be paid to the spouse.

Or Spouse may opt to continue to get pension, and get the corpus later on.

Spouse will get the same amount of pension.

No question of family pension.

* Those who want to switch to other jobs at any time, may continue the same NPS account with the new job.

i.e. Amount in the employee's account will be carry forwarded.

No condition of 5 years or 20 years service.

No loss of accumulated amount.

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