What Does the Pension Fund Amendment Bill Mean for You?

The Centre is likely to introduce the Pension Fund Regulatory and Development Authority (PFRDA) Amendment Bill in the Monsoon Session of Parliament. According to recent reports, the government has drawn up amendments to the law to introduce additional flexibility in withdrawal for subscribers of pension schemes and bring under-regulated superannuation funds within its ambit. 

A committee of secretaries has been discussing the bill for a few months now, and the amendment aims to delink the National Pension System Trust (NPS Trust) from the regulator.

What are PFRDA and NPS Trust?

The PFRDA Act was notified on February 1, 2014. It entrusted PFRDA with regulating the National Pension System (NPS), subscribed by central and state government employees, private institutions, organisations, and the unorganised sectors except for the Armed Forces.

The NPS Trust was established by PFRDA for managing assets and funds under the NPS in the best interest of subscribers. Assets under NPS architecture are owned by the Trust and are held to benefit the subscribers under the scheme. 

NPS subscribers are the beneficial owners of the securities and assets of the funds. These are, however, purchased by the Trustees. 

The NPS Trust is responsible for monitoring the operational and functional activities of NPS intermediaries, including custodians, pension funds, trustee bank, Central Recordkeeping Agency, point of presence, aggregators, and that of IRDAI registered annuity service providers empanelled with PFRDA. 

The Trust also provides directions and advisory to pension funds to protect subscribers' interest, ensure compliance through audits by independent auditors, and performance review of pension funds.

The centre plans to separate PFRDA – the regulator, from the NPS Trust so that the entity that handles the funds and the regulators are different organisations. It is expected to reduce the possibility of conflict of interest between the two.

What is the National Pension Scheme?

Under NPS, subscribers can make a minimum contribution of Rs 6,000 a year. It can be paid as lump-sum or as monthly instalments of a minimum of Rs 500. The Trustee invests contributions in market-linked instruments, including debt and equity. The performance of these investments determines their returns. The current interest rate of NPS is between 8 and10 per cents on contributions made.

Any Indian between 18 and 60 can open a National Pension Scheme account Regulated by PFRDA. The scheme matures at the age of 60 years for its subscriber and can be extended up to 70 years. 

At present, NPS allows partial withdrawal of up to 25% of the contribution after three years of opening the account in specific situations like purchasing a home, sponsoring a child's education, or treating any critical illnesses. This is likely to increase as the bill is passed.

NPS Benefits

Part of the contribution in the NPS scheme is invested in equities, which offers higher returns compared to traditional tax-saving instruments like Public Provident Fund. It returns between 9 and 12 per cent and suits individuals aiming to accumulate funds and financially secure life after retirement.

Tax Benefits

Contributions towards the NPS scheme are tax-exempt under Section 80C of the Income Tax Act up to the ceiling of Rs.1.5 lakh per year. Contribution by employers and employees is applicable for the tax exemption.

Post Retirement Withdrawals Rules

The scheme allows individuals to withdraw 60 per cent of the accumulated fund. It is tax-exempt. The rest, 40 per cent, must be kept aside to receive a regular annuity from the PFRDA registered insurance firm. 

The bill, once passed, will offer additional withdrawal options to make the scheme attractive. For example, the centre is looking at the possibility of allowing subscribers to invest in systematic withdrawal plans, which provide regular post-retirement income every month. 

Another option being looked at includes introducing inflation-indexed annuities. These may be benchmarked to 10-year government securities.

Yet another option is to allow subscribers to invest a part of the funds in a deferred annuity to earn better returns. 

The most significant change would be in the regulation of these superannuation funds. At present many escapes the regulator ambit. The amended law will require these funds to register with PFRDA who will maintain oversight. 

The Employees Provident Fund Organisation that also handles pension schemes will remain outside PFRDA's ambit.

What are Annuities?

An annuity is a predetermined sum an individual receives for the rest of their life on the remaining 40% after maturity. This is like a pension, and one can choose to receive it monthly, quarterly, half-yearly, or yearly.

While immediate annuity starts paying immediately, deferred annuities start payments after a predetermined period. Returns on deferred annuities are generally higher than immediate annuities as the money invested earns returns when it doesn't pay any pension to its subscriber. The amendment will allow subscribers to opt for deferred annuities too.