Superannuation can be defined as the funds which are paid by an employee during his/her employment tenure, and which return as a pension on a regular basis when the person gets retired. Superannuation is a form of retirement benefit that employers offer to employees. This may be the result of government mandates or could be an incentive for employee retention.
Types of superannuation benefits plans available in India
India has two types of superannuation benefit plans :
- Defined-benefit superannuation
These schemes have a defined benefit, fixed and known to the employees, based on their period of service, position, and final salary. In fact, these are more popular among employees, because it entitles them to a pension, regardless of their contribution.
- Defined-contribution superannuation
These schemes are easier to manage as the final benefit directly correlates with the employers’ and employees’ contributions. Moreover, the scheme only defines the contribution of both and leaves the outcome to market forces. Indeed, most modern pension schemes are defined contribution plans.
How to plan retirement with Superannuation schemes?
There are different schemes available to help plan retirement funds.
1. Pension Plans for accumulating retirement savings
- National Pension Scheme: This is a defined contribution plan that a government body manages.
- Public Provident Fund: There are certain maximum limits for availing of this plan. Additionally, the relevant authority declares interest rates every year, and these rates tend to be higher than fixed deposit rates.
- Atal Pension Yojana: This plan is aimed at lower-income groups and is a defined-benefit plan.
2. Plans for generating pension after retirement
- Life annuities: These are of different types. Of these, the most common is one that offers a fixed monthly income while the insured person is alive and, on their death, the nominee receives the premium. Also, life insurers are the ones who offer life annuity plans.
- Monthly income plans: Insurers, mutual funds, and banks offer monthly income plans.
Case study: Different superannuation plans for different people
Ramesh Singh is retiring from DSK Enterprise this year, after 15 years of exceptional service. He will receive gratuity and provident fund payments. Ramesh will also receive a pension under the Employee Pension Scheme, as DSK Enterprise has been a part of EPF since its early days. Overall, he has a good lump sum to start the golden years of his life.
Sumit, Ramesh’s son, started working for a start-up three years ago. Now, he too subscribes to the National Pension Scheme, on Ramesh’s insistence, since NPS offers higher growth and better tax benefits than EPF. Sumit’s organization has not yet subscribed to any retirement schemes as most of its workforce is made up of consultants.
Even if Sumit’s organization subscribes to EPF or NPS, contributing to it is not compulsory for them. Because Sumit’s basic pay is higher than the minimum threshold specified by regulations. (These minimum thresholds change from time to time, and you should check current levels with the relevant authorities.) This means he can choose to continue his NPS account without connecting it to his employer. But the contributions to the Tier I account will certainly ensure a comfortable retirement for him when he turns 60.