To replace the defined-benefit Old Pension System, the defined-contribution New Pension System (NPS) was first introduced for government employees, which was later opened for non-government sectors and the general public.
Entry and Maturity Age
In sync with the retirement age of government employees, the NPS was earlier allowed to continue up to 60 years of age. However, the entry age of joining NPS has now been increased to 65 years of age and the maturity age to 70 years.
So, an individual may now join NPS even after 60 years of age till becoming 65 years old and the NPS beneficiaries may continue the scheme till 70 years of age. Individuals joining the scheme after 60 years of age will have the option of normal exit after 3 years from the date of joining.
Commutation and Pension
On normal exit a beneficiary gets the option to commute up to 60 per cent of retirement corpus and needs to invest at least 40 per cent of the corpus amount to buy a pension plan from an IRDA-regulated insurance company.
However, if a beneficiary, who joined after 60 years of age, moves out of NPS before completion of 3 years from the date of opening a Tier-1 account, 80 per cent of the corpus has to be used to buy a pension plan and only 20 per cent can be commuted.
Amount of Pension
The amount of pension will depend on the rate of annuity offered by the pension provider – i.e. the insurance company from which a pension plan is purchased – at the time of buying the pension plan.
The annuity rate depends on the overall interest rate in the economy. That means, if the key policy rates set by the Reserve Bank of India (RBI) are high, the annuity rate will be high and if the policy and Bond/FD rates are low, the annuity rate will also be low.
Apart from the overall interest rates, the annuity rate will also depend on the annuity option chosen. For example, the rate of annuity for the “annuity for life” option will be higher than the “annuity for life with return of purchase price” option.
So, the amount of pension will depend on the amount of corpus invested, overall interest rate in the economy, the rates offered by the insurance provider and selection of the annuity option.