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?
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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.
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