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Retirement and Pension Benefits

Retirement and Pension Benefits


Retirement and Pension Benefits

Why Retirement and Pension Benefits

In developed and developing nations, the employees are provided social security based on their service record. In United States of America (USA), an employee with 40 credits becomes eligible for retirement and pension benefits. The 40 credits are gained with at least 8 years’ service in USA. At the time of retirement i.e. age of 60 or above, the employee is retired from the service and suddenly the earnings fall due to non-payment of salary. The social security schemes including Employees’ Pension Scheme (EPS), Gratuity, and other facilities are provided to secure his future keeping in view his contribution for the economic development of the organization he worked with. In India, as per the judgement of Central Administrative Tribunal, a Government employee requires to complete at least 20 years of service to be eligible to claim the retirement or pensionary benefits.   

What to do if no retirement and pension benefits by organizations?

There are various private sector organizations offering retirement and pension benefits to the employees, but it is also possible that the organizations make no provision for providing such benefits or make very insufficient provision for providing retirement and pension benefits. In such cases, the employee requires more savings for the after retirement period. There is a separate discipline to study the consequences and investment patterns i.e. Retirement Planning.

Retirement Planning:

The amount of pension may be insufficient after retirement because there is more requirement to tackle the health problems in old age. The harder the efforts an employee made in his service period, the higher the chances of his physical and mental disorders in the old age are. It doesn’t mean that the hard work should not be done, it means that while doing hard work, an employee should also keep adequate diet, relaxation exercises to stay healthy even after the retirement. The organizations offer pension to ensure the employees and the employees work harder without any stress for the old age.
For retirement planning, the financial companies are offering pension plans in which a person can invest money during the service period and a corpus is managed by the company for providing pension after the service period. The computation of expected expenditures after retirement and how much to save during employment to cover such expected expenditures; is the main focus of Retirement Planning. The plans offered by the financial companies are known as pension plans. Anybody can approach LIC, HDFC, SBI, ICICI, and other banking organizations and get the details about the pension plans of the concerned organization. 

Pension Plans for Earnings:

Each employee, common citizen of India requires security after the age of 60 and the pension plans provides not only security but also earnings in the form of interest or return on investment in the pension plans. Even the Government provides deduction on income tax payable in case amount is invested in retirement plans i.e. pension plans. The pension plans with prior planning be fruitful after the retirement and one get so much benefits. The life becomes financially secure and it depends upon the requirement of an individual how much he wants to get as pension, the higher the amount required the higher the amount is required to be invested in a pension plan.

Benefits at the time of Retirement:

Whenever an employee is retired, various types of benefits are computed to be provided on the final day of the service i.e. (i) Pension, (ii) Gratuity, (iii) Payment of Provident Fund (iv) Leave Encashment, (v) Payment of Group Insurance Scheme, (vi) Travelling Allowance at the time of Retirement, (vii) Other benefits

(i) Pension:

In India as well as USA and other developed nations, an employee becomes eligible to get pension after completion of 10 years of service. The pension rules are framed and notified by the government or non-government organizations. The amount of pension is computed on the basis of last drawn salary. In Haryana state, the age of retirement is 58 years for Group A, B, and C employees and 60 years for Group D employees. The condition for entitlement of pension is completion of at least 10 years’ service (only for the employees joined service prior to 1st Jan, 2006). Most of the individuals prefer to receive partial amount in the form of lump sum and remaining to be invested in annuities for generating a fixed amount of income to be received as monthly pension.

Computation of Pension:

For computing the amount of pension, maximum 33 years’ service is taken into account. In Central Government of India, the minimum pension is determined at Rs. 9000 per month and maximum up to 50% of the highest pay. The employee is provided with the option to commute the pension up to 40% and receive it as a lump sum amount on the date of retirement or within one year of the retirement. A commutation table is used to compute the lump sum amount to be provided to the employee. To the extent, pension is commuted, the amount of monthly pension after retirement is reduced for 15 years from the date of receipt of the commuted amount. The formula for deriving commuted value of pension is Commuted factor multiply by 12 and percentage to the extent pension is commuted up to 40%.
The remaining portion which is not commuted is provided as monthly pension.

(ii) Gratuity:

As per gratuity act, an employee after completing the 5 years of service, becomes eligible to get gratuity which is computed as รจ (Basic Pay + Dearness Allowance) multiplied by ¼ multiplied by half yearly periods of qualifying service. The amount of gratuity can be maximum up to Rs. 20 Lacs.

Service Gratuity:

The employees who joined before 1st Jan 2006 and have qualifying service less than 10 years at the time of retirement, are entitled to get Service Gratuity apart from Retirement Gratuity. The amount of service gratuity is paid as one time lump amount equal to the half month’s basic and dearness allowance for each half year completed in the qualifying service.

(iii) Provident Fund:

During the service, a portion (i.e. 12% or 10%) of the salary of employee with a contribution by employer are deposited in a provident fund and at the time of retirement, the amount is received by the employee. The provident fund is particularly managed by the government to ensure the social security of the employees. The Provident fund account is either Statutory or Recognized or Public Provident Fund. The provident fund as savings scheme is managed in various developed and developing countries including India, Singapore etc. In India, the provident fund contribution was stopped in most of the states after implementing the New Pension Scheme (NPS), for example in Haryana State, after implementing NPS on 1st Jan, 2006, the employees joined after 1st Jan, 2006 are not entitled to contributed in Provident Fund as they contribution is made in New Pension Scheme.

Best Pension Plan:

There are a lot of pension plans and most of the people choose life annuity plan which offers pension till death of the subscriber. However, the National Pension System has also become more attractive now-a-days with inclusion of various benefits for the subscribers. Now the tax is levied only on 20% of the corpus withdrawn on the maturity of the plan. Each pension plan in India, is regulated under the Pension Fund Regulatory & Development Authority (PFRDA) and only six pension fund managers are provided power to maintain the pension funds.

(iv) Leave Encashment:

 During the service of an employee, the employers as well as government offers to credit their leave account with paid leaves every year on the basis of their working period in the organization. At the time of retirement, such leaves are encashed and an amount is provided to the employees.

Copyright © 2019 Dr. Lalit Kumar. All rights reserved.

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