Everyone plans on retiring early and living the golden years of their lives just the way they want. Planning for retirement and starting early with that planning is one of the most crucial financial decisions you make. Choosing the best retirement plan can be overwhelming with all the available options.

Among the various retirement savings plans, the National Pension System (NPS) is still a popular choice in India. In this article, we will be comparing NPS vs. other pension plans.

What Is a Pension Plan?

A pension plan is a type of retirement savings plan that helps you systematically accumulate funds during your working years, which is then used to provide you with a regular income after your retirement. Based on your needs, you choose a plan that best works for you.

Types of Pension Plans available in India

There are several types of pension plans designed to help meet specific retirement goals. Let’s compare NPS and other pension plans:

National Pension Scheme (NPS)-

The National Pension Scheme is a central government initiative managed by the Pension Fund Regulatory and Development Authority (PFRDA). It allows people to invest a certain amount at regular intervals during their employment period, allowing them to invest flexibly and easily towards retirement.

Under this scheme, both employee and employer contributions are allowed. It offers flexibility in choosing favourable investment options like equity, government securities, and corporate bonds. You can decide where to invest based on your risk appetite, profit expectations, etc. NPS also provides tax benefits up to ₹1.5 lakh, which are deductible under Section 80CCD(1) and an additional ₹50,000 under Section 80CCD(1B). If you invest in NPS, you can withdraw 60% of the corpus as a lump sum (tax-free), and 40% must be used to purchase an annuity, which provides regular income.

Employees’ Provident Fund (EPF)

The Employees' Provident Fund (EPF) is another way to invest towards your retirement savings. EPF is managed by the Employees' Provident Fund Organisation (EPFO). Like NPS, employees and employers contribute a fixed percentage of the employee's salaries. The amount you invest towards the EPF is further invested in government bonds and other secure instruments where your money can grow over time. Since there's not much risk, the returns are also quite nominal. As for the tax benefit, in EPF, contributions up to ₹1.5 lakh qualify for deduction under Section 80C. Interest earned and maturity proceeds are tax-free if the account is held for at least five years. One of the primary features of EPF is the ability to make a premature withdrawal. After five years of continuous service, you will receive a tax-free withdrawal; otherwise, withdrawals are subject to tax.

Public Provident Fund (PPF)

One more way to secure your post-retirement life is to invest in the Public Provident Fund (PPF), managed and regulated by the Ministry of Finance of India. Under this pension scheme, individuals can contribute up to ₹1.5 lakh annually.

The money that you invest in PPF gets further invested in government-backed securities. You can save tax on your contributions under Section 80C, and the interest earned and maturity proceeds are tax-free.

Immediate Annuity Plan

In an immediate annuity plan, you pay a lump sum to the insurance company at a time of your choice and start receiving monthly payments immediately afterwards. The payout frequency and the amount will be mentioned in the contract made at the time of your investment.

There's a minimal risk involved in this retirement plan, but the returns are also comparatively lesser.

Deferred annuity plan

Unlike in the immediate annuity plan, in a deferred annuity plan, you start receiving the monthly payments later in the future. You select the time and terms. In a deferred annuity plan, you can make either lump-sum or monthly payments. Under this plan, you also get the liberty to choose the date you want to start making payments (which can be any time in the future).

The returns are constant, and the risk is very minimal.

Unit-Linked Insurance Plans (ULIPs)

A Unit-linked Insurance Plan (ULIP) is a versatile financial product that combines insurance and investment benefits in a single plan. Your payments for a ULIP are divided between health insurance and retirement savings. The value of your investment in a ULIP depends on the performance of the chosen investment funds, allowing for potential capital growth over time.

ULIPs also allow you to shift your investment plan to meet your financial goals.

Atal Pension Scheme

The Atal Pension Scheme (APS) is a government-backed retirement savings plan that provides a secure and regular income for unorganised and low-income workers. Under the scheme, individuals contribute a fixed monthly amount based on age and the desired pension amount, typically starting as low as ₹42 per month. APS ensures a fixed monthly pension of ₹1,000 to ₹5,000, depending on the contributions made.

A comparison between NPS vs. other Pension schemes:

How Do You Choose the Right Pension Plan?

Assess Your Retirement Goals

Decide at what age you plan to retire. Calculate the money you would need monthly or annually post-retirement to maintain your desired lifestyle. Consider factors like inflation, healthcare costs, and any potential lifestyle changes.

Evaluate Your Risk Tolerance

Ask yourself: Do you want higher returns and higher risk, or are you looking for nominal returns with nominal risk?

Consider Tax Benefits

Look for plans that offer tax deductions on contributions (e.g., NPS under Section 80CCD, EPF under Section 80C). Check the tax implications on the maturity amount and regular payouts. Some plans offer tax-free returns (e.g., PPF), while others may have taxable income (e.g., annuities).

Assess Flexibility and Liquidity

Evaluate if the plan allows for varying contribution amounts or lump-sum investments. Check the rules regarding withdrawals or partial withdrawals, especially in emergencies.

Evaluate fees

Understand the fees for managing the pension plan, such as administrative, fund management, or surrender charges.

Review the Provider’s Credibility

Choose a reputable insurance company or fund manager with a strong track record and good customer service.

Analyse Plan Terms and Conditions

Review the types of payouts offered (e.g., lifetime annuity, joint life annuity) and how they align with your needs.

For further details, do read this interesting article on the Shriram Life Insurance page.

FAQs

1. Which is better NPS or pension plan?

Choosing between the National Pension Scheme (NPS) and a pension plan depends on your financial goals and retirement needs.

For comparison between NPS vs. other pension plans:

• NPS: This is a government-backed scheme offering tax benefits and a mix of equity and debt investments, which can potentially provide higher returns compared to traditional pension plans. It allows for a flexible investment approach and partial withdrawals under specific conditions.
• Other Pension Plan: Traditional pension plans (such as immediate or deferred annuity plans) offer guaranteed income after retirement. They can be more predictable and less risky but might not offer the same potential returns as NPS.

2. Which pension scheme is best?

The best pension scheme depends on individual circumstances, but the National Pension System (NPS) is a popular choice due to its flexibility and tax benefits. However, schemes like Atal Pension Yojana (APY) may be more suitable, depending on the individual's needs. For more details on pension schemes, please reach out to your trusted financial advisor who can help you navigate all your financial queries.

3. Which is the best retirement plan?

The best retirement plan depends on individual needs and goals. Popular options include the NPS, Employee Provident Fund (EPF), Public Provident Fund (PPF), and various insurance-based pension plans. NPS offers tax benefits and the potential for higher returns, EPF is mandatory for salaried employees and provides a guaranteed return, PPF is a low-risk option with tax benefits, and insurance-based pension plans often come with guaranteed returns and additional insurance coverage. Consider factors such as returns, tax benefits, risk tolerance, and investment horizon when choosing the best pension scheme for you.

4. What is better than NPS investment?

There are many options available in the market including mutual funds, equity investments, or high-yield bonds, which could potentially offer higher returns but come with increased risk. For tax saving and long-term investment, PPF or ELSS (Equity-Linked Savings Scheme) might also be considered.

5. Is NPS better than PPF?

NPS is a long-term retirement plan with the potential for higher returns due to its further investment to equities, bonds, and other assets. It offers tax benefits and provides a pension upon retirement. PPF is a risk-free investment with a fixed interest rate, offering tax benefits and a guaranteed return.

It depends on you whether you’re looking for higher potential returns and can handle some risk, NPS might be better. If you prefer a risk-free, guaranteed return, PPF could be more suitable.

6. Can I claim both PPF and NPS?

Yes, you can claim benefits under both PPF and NPS. PPF contributions are eligible for tax benefits under Section 80C of the Income Tax Act, while contributions to NPS are eligible for additional tax benefits under Sections 80C and 80CCD. By contributing to both, you can maximize your tax savings and diversify your investment for retirement planning.