Advantages and Disadvantages of National Pension Scheme

The pension system in India is intricate. The National Social Assistance Programme (NSAP) for the elderly poor, the civil servant’s pension (now open to all), the mandatory defined contribution pension programs run by the Employees' Provident Fund Organization of India for private sector employees and employees of state preserved corporations, as well as several voluntary plans, are the three main pillars of the Indian pension system.

Investors in the former make annual premium payments until they reach retirement age. After that, the second step, also referred to as the vesting stage, would start once the participant reached retirement age. As part of the pension plan, the retiree will now begin receiving annuities up until their passing or the passing of their designated beneficiary.

Meaning of Pension

Retirement plans are another name for pension programs. You may contribute a portion of your income to the corresponding plans in these. Having a reliable income after retirement is the main goal of a pension plan. It has become vital to invest in these programs due to their rising prices.

Therefore, even if you have a sizable amount of funds in your bank account, a pension plan may still be necessary. Savings are typically used to cover unforeseen expenses. As a result, funding a pension plan will ensure your assistance after all other sources of income have dried up. The accumulation stage and the vesting stage are the two phases of Indian pension plans.

Types of Pension Plans

You can review the various types of pensions plans below −

  • Plans offered by insurers are best suited for conservative investors because they only invest in debt.

  • Plans that invest in both debt and equity and are unit-linked.

  • The National Pension Scheme invests up to 75% of its assets in equity and either 100% of its assets in government securities, 100% of its assets in debt securities, or both.

Classification of Pension Funds

The following categories are used to categorize pension funds −

  • National Pension Scheme − For people who desired to increase their pension amount, the government of India created a pension system in 2004. Depending on your preferences, your funds will be invested in the debt or equity markets. At retirement, you are permitted to withdraw 60% of the funds, with the remaining 40% going toward an annuity purchase.

  • Deferred Annuity − You can build a corpus through a single premium or recurring premiums over the course of the policy term with a deferred annuity plan. Once the policy period expires, the pension will start. Tax advantages exist with this delayed annuity plan because no tax is applied to the invested funds until you decide to withdraw them. Either a one-time payment or recurring contributions can be used to purchase this plan. So, whether you want to invest the entire sum at once or want to invest gradually, it works for you.

  • Immediate Annuity − In this kind of plan, the pension is paid out immediately. Your pension begins the moment you deposit a lump sum of money. Based on how much the policyholder invests, this. There are numerous annuity alternatives available. The instant annuity plan premiums are exempt from taxes under the Income Tax Act of 1961. The nominee is the one who is entitled to the money once the policyholder passes away.

Advantages of Pension Plans

The following is a list of some benefits of investing in pension plans −

  • Long-Term Savings − These programs act as a long-term savings plan; whether you choose to make one large payment at once or several smaller payments over time, the savings are guaranteed. Pension plans produce an annuity that can be further invested in and result in a consistent stream of income after retirement.

  • Works As a Life Insurance Cover − Some pension plans provide investors with a lump sum payment upon retirement or in the event of the investor's demise, whichever comes first. As a result, your pension coverage also acts as a form of life insurance.

Disadvantages of Pension Plans

There are some disadvantages of pension plans which are as follows

  • High Returns Require High-Risk Taking − You might need to look for high-risk solutions to generate larger returns in order to make sure that the payout at the time of your retirement is acceptable. The effects of inflation may not be sufficiently mitigated by conventionally safe investment solutions.

  • Limited Amount of Assumption Allowed − Despite the fact that tax deductions are available for pension plans, the Income Tax Act of 1961 only permits a deduction of up to Rs 1.5 lakh for life insurance premiums.

  • Best Appropriate for Early Investors − This investment choice might be a little too late for you if you are not an early investor. When compared to someone who invests when they are 30 or 35 years old, someone who invests when they are 21 will receive returns that are significantly higher.

Mandatory State Provident Pension Provision

All private sector and state-owned company employees in India are covered by this required program, which is a component of the country's Social Security system. It is managed by the Employees' Provident Fund Organization (EPFO), a social security organization. According to this system, an employee contributes 10% to 12% of his monthly salary, his employer matches that amount, for a total contribution of 20% to 24% of the employee's gross salary, and the state adds an additional 1.16%, for a total contribution of 25.16% of the employee's gross salary.

The contributions support the required provident fund, the required pension plan, and the required life and disability insurance programs. Once the employee reaches the legal retirement age, they can receive the lump sum they contributed to their provident fund, as well as any interest accrued. The dependent receives a monthly stipend for the rest of their lives in the event of death or permanent incapacity while at work.

The majority of retired workers choose lifelong annuities or pension plans from state-owned banks or insurance companies with a lump-sum payment, which gives them a monthly pension amount that is close to 50% of their final income for a lifetime.


A pension fund is an important source of retirement income, regardless of whether you are a self-employed person or an employee of a huge organization. In your retirement years, it might assist you in achieving financial security and mental tranquility. As a result, it serves as a useful financial tool that enables you to enjoy your retirement years without having to worry about money.

Frequently Asked Questions

Q1. Do pension funds count as mutual funds?

Ans. By making investments in market-linked mutual fund schemes, a pension fund can be established. The National Pension Scheme and several insurance firms offer the chance to invest in hybrid funds, debt securities, equity securities, and government securities to construct a pension corpus.

Q2. Define the term Pensions crisis?

Ans. The expected difficulties in paying for corporate or government employment retirement pensions in several nations due to a discrepancy between pension commitments and the resources set aside to cover them is known as the "pension crisis" or "pension timebomb."

Q3. What is Retirement?

Ans. Retirement is the cessation of one's employment, occupation, or active working life. Another way to semi-retire is to work fewer hours or with a smaller job. When they are old or unable to work due to health issues, many people decide to retire. People may also retire when they are eligible for private or public pension benefits, while others are compelled to do so due to legislation governing their jobs or because their physical conditions make it impossible for them to continue working.

Updated on: 08-May-2023


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