Montek Singh Ahluwalia, the former Deputy Chairman of the Planning Commission, has said that selecting the Old Pension Scheme instead of the New Pension Scheme is a bad idea. He noted that the New Pension Scheme (NPS) is adaptable and can be adjusted to accommodate any issues that may arise.
Speaking to news agency ANI, Ahluwalia said: “…The fact that we moved away from the Old Pension Scheme to the New Pension Scheme is good…It happened during the Vajpayee govt, during the UPA it continued, as far as Central govt is concerned it still continues. But some states going back to the Old Pension Scheme is a mistake. We will see how well they do…You can always modify the New Pension Scheme to take care of the concerns raised. Going back to the Old Pension Scheme is a bad idea.”
The Old Pension Scheme (OPS) ensures that government employees receive a pension equivalent to 50% of their last drawn basic pay, both at the central and state levels. In addition to this, a Dearness Allowance (DA) is provided to adjust for the rising cost of living, which is calculated based on a percentage of the basic salary.
When the government increases the Dearness Allowance, they also raise the Dearness Relief for retirees. OPS guarantees that upon retirement, employees will receive half of their salary as a pension. The scheme includes the General Provident Fund (GPF) where employees can contribute a portion of their income, and upon retirement, they receive this amount with accumulated interest.
OPS facilitates payments that are processed through the government treasury, guaranteeing direct financing of pensions by the government. In the event of a retired employee’s passing, their family will continue to receive pension benefits.
The National Pension Scheme (NPS) was introduced in January 2004 as a retirement plan tailored for government employees. In 2009, it was extended to encompass all industries. Administered in collaboration with the government and the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is a voluntary, long-term investment scheme intended for retirement planning.
NPS in India is structured into two tiers: Tier 1 and Tier 2 accounts. Tier 1 accounts are primarily for retirement savings, as funds can only be withdrawn post-retirement. In contrast, Tier 2 accounts offer the flexibility of early withdrawals, catering to investors who prefer more control over their investments.
Under the NPS, individuals can withdraw 60% of their total accumulated corpus upon reaching retirement age, and this portion is exempt from taxes. The remaining 40% is generally used to purchase an annuity product, which currently provides a pension equivalent to about 35% of the individual’s final salary before retirement. This structure aims to ensure a steady income stream for retirees while offering tax benefits on a significant part of the corpus.