The primary purpose of introducing the National Pension System (NPS) in 2004 was to replace the defined benefit pension system of government employees with the defined contribution pension system for the employees who joined government services on or after January 1, 2004. The doors of NPS was opened for the general public in 2009.
So, unlike the old pension system, where a government employee used to get a certain amount of inflation-adjusted pension after retirement on the basis of his/her salary structure before retirement, under NPS (earlier known as New Pension Scheme), government employees would make a defined contribution per month to the pension fund on the basis of his/her monthly salary, but the pension benefit would depend on the value of retirement corpus accumulated at the time of retirement.
On retirement at the age of 60 years, an employee may withdraw up to 60 per cent of his/her retirement corpus accumulated in the NPS fund in lump sum and at least 40 per cent of the corpus has to be invested in an annuity scheme of a life insurance company governed by the Insurance Regulatory and Development Authority of India (IRDAI).
If a subscriber retires or discontinues NPS before the age of 60, he/she has to mandatorily put at least 80 per cent of the retirement corpus in an annuity scheme.
For pension/annuity purpose, a subscriber has to select an annuity service provider (ASP) out of the following seven ASPs:
1. Life Insurance Corporation of India
2. SBI Life Insurance Co. Ltd.
3. ICICI Prudential Life Insurance Co. Ltd.
4. Bajaj Allianz Life Insurance Co. Ltd.
5. Star Union Dai-ichi Life Insurance Co. Ltd.
6. Reliance Life Insurance Co. Ltd.
7. HDFC Standard Life Insurance Co. Ltd
Moreover, out of the foll0wing seven generic annuities that are offered by ASPs, a subscriber has to choose one annuity option:
- Pension (Annuity) payable for life at a uniform rate to the annuitant only.
- Pension (Annuity) payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive.
- Pension (Annuity) for life with return of purchase price on death of the annuitant (Policyholder).
- Pension (Annuity) payable for life increasing at a simple rate of 3 per cent per annum.
- Pension (Annuity) for life with a provision of 50 per cent of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Pension (Annuity) for life with a provision of 100 per cent of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Pension (Annuity) for life with a provision of 100 per cent of the annuity payable to spouse during his/her lifetime on death of the annuitant and with the return of purchase price on death of the spouse. If the spouse predeceases the annuitant, payment of annuity will cease after the death of the annuitant and purchase price is paid to the nominee