The New Pension Scheme works on defined contribution basis and will have two tiers – Tier-I and II. Contribution to Tier-I is mandatory for all government servants joining government service on or after 1-1-2004 (except the armed forces in the first stage), whereas Tier-II will be optional and at the discretion of government servants.
The Tier II account works more like a savings account where you can withdraw your money whenever you wish. You can make your contributions using your permanent retirement account number at any of the designated points of select banks.
In the old pension scheme, government employees were getting pension as an additional post-retirement benefit. But, the new scheme provides for pension based on the contributions from the employees and the income accrued in a fund set up for the purpose.
The pension funds will be invested in the stock market and the quantum of pension is therefore subject to its vagaries. The lives of the retirees would therefore swing as per the bulls and bears of capital market.
As per a new order, a member of Employees’ Provident Fund (EPF), being a member of a co-operative society or a housing society having at least 10 members of EPF, can withdraw upto 90 per cent from the Fund for purchase of dwelling house/flat or construction of dwelling house/acquisition of site.
In Tier-I, a government servant will have to make a contribution of 10% of his basic pay plus DA, which will be deducted from his salary bill every month. The government will make an equal matching contribution. There will be no matching contribution in respect of non-government employees.
A government servant can exit at or after the age of 60 years from the tier-I of the scheme. At exit, it would be mandatory for him to invest 40 per cent of pension wealth to purchase an annuity (from an IRDA-regulated Life Insurance Company) which will provide for pension for the lifetime of the employee and his dependent parents/spouse.
He would receive a lumpsum of the remaining pension wealth which he would be free to utilize in any manner. In the case of government servants who leave the scheme before attaining the age of 60, the mandatory annuitization would be 80% of the pension wealth.