As many are aware, all Government employees who have joined service on or after January 1st, 2004, are covered under the National Pension System (NPS). While the NPS definitely has the word “pension” in its name, it isn’t really a pension scheme, and if you are covered under the NPS, please do understand what the NPS will do for you, and what it won’t, so that you can prepare accordingly.
Note: This article is for government employees who chose to remain in the NPS (instead of switching to the UPS) and for those working in Central Autonomous Bodies for whom the UPS does not apply.
About the author: A Freefincal reader who is a Government employee.
Many Government employees join service fairly young, say in their 20s. These people earn as per the Government pay scales, which account for regular increments as well as inflation-linked Dearness Allowances. Thus, during their work tenure, they have predictable salary rises with the passing years, with Pay Commissions adding to the jumps. The key difference between those who joined before and after 2004, however, becomes apparent only after retirement.
National Pension System: Not a Pension System!
The Old Pension scheme (for pre-2024 hires) is a defined benefit scheme, wherein the Government will pay you an inflation-linked pension for as long as you live. This used to be fine in the past decades, since the Government could afford to pay such pensions. However, with the increasing life spans, paying out increasing pensions over a long duration becomes unsustainable. So, we now have the NPS, which is also a pension scheme, right?
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
Unfortunately, even after decades of the NPS becoming operational, Government employees, journalists and finfluencers, all still parrot the same line that the Government provides a pension under the NPS. This is not strictly true, unless the employee opts for the UPS (which we don’t cover here). The NPS is a defined contribution scheme, wherein the employee and the Government contribute to an account through which the money is invested into stock and bond markets. The employee accrues this amount throughout his/her service. When the employee who has joined service in the mid-2000s, or later retires after 2035, he/she will be given:
- up to 60% of the accrual as a lumpsum amount.
- at least 40% for purchase of an annuity (payments from an insurance company for the rest of the employee’s life)
Put simply, you have to create your own pension using the money that you have accrued. There are now several questions that come to mind:
- Is the money that you have accrued through the market linked scheme enough to take care of you for the rest of your life?
- Even if the answer is yes, are you equipped to invest that money wisely to ensure that it provides you inflation protected income through your lifetime?
The answers to the above questions are unknown today. So, we will have a large cohort of Government employees retiring from 2035 onward who will have to figure out the answer to these questions on the go; a dangerous predicament to be in. If the retiree has no knowledge outside fixed deposits and savings accounts, a large corpus would be needed to sustain their retired life, and venturing into market linked products such as mutual funds and stocks for the first time beyond the age of 60 is also not a great place to be in. Even worse, I fear that vultures would circle these people with promises of huge returns using their accrued capital, and this could lead to dangerous consequences for the uninitiated.
The knowledge gap
The one consistent observation that I have made is that people often postpone decisions regarding savings, investments and retirement, and are very comfortable in accepting that they do not know about these aspects. Worse, those who discuss about investments and retirements may even be subjected to some scorn, for being “money-minded”. This is a very dangerous situation, since knowledge about insurance, investments and post-retirement benefits are an essential aspect of your life that must not be postponed. Living in the here and now and postponing decisions when your salary comes to an abrupt end is a recipe for disaster. So, much like you care for being healthy and physically fit, ensuring that you are financially fit is also something that you should not postpone!
What can we do NOW?
To ensure that we do not fall into the trap of not having enough to retire, I would urge you to learn about investing for the future NOW. Here are some approaches:
- Find that trustworthy colleague who is considered money-savvy; not the one who does day-trading on the job, but has their term insurance, SIPs etc. set, and ask them for help.
- Develop your knowledge from unbiased sources such as this website. By unbiased, I mean those sources which are not selling you financial products in the garb of imparting knowledge.
- Engage a fee-only financial planner. A fee-only financial planner works on a flat fee in your own interest, and does not benefit from the financial products he/she recommends. The fee may seem large to some, but trust me, the amount you stand to lose by not taking action quickly is several times this amount.
In summary, please take action now to work towards a worry-free retirement. Do not postpone these issues till you turn 60, prepare NOW.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
Use our Robo-advisory Tool to create a complete financial plan! More than 3,000 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
🔥Join our community of 9000+ users! 🔥Avail massive discounts on our courses + freefincal investor circle!
Track your mutual funds and stock investments with our Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
Connect with him via Twitter(X) LinkedIn YouTube
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
Your Ultimate Guide to Travel
