JAIIB IE and IFS Paper-1 Module-D Unit 15 : Pension Products

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Aug 7

JAIIB Paper 1 (IE and IFS) Module D Unit 15 : Pension Products (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called "Insurance Products". Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module D (FINANCIAL PRODUCTS AND SERVICES ) Unit 15 : Pension Products Aspirants must go through this article to better understand the topic, Pension Products and practice using our Online Mock Test Series to strengthen their knowledge of Pension Products. Unit 15 : Pension Products

Pension System and Its Aspects

A Pension provides a monthly income to the people during their unproductive years. Pension is necessary for the following reasons:

Decreased income earning potential, with increase in age,
The rise of nuclear family,
Migration of earning members,
Rise in cost of living,
Increased longevity, and
Dignified life in the old age due to less financial dependence.

Pension Products

While both pension and life insurance products help individual to take care of one's future and the future of one's family members, there are a few differences between life insurance plans and pension plans.
While life insurance protects the individual from the financial consequences of premature death, pension products address the risk of living too long so that one's resources are adequate to support one's standard of living during the old age.

They generally have two stages of operation of pension products:

Accumulation stage

When one pays a specific amount regularly until the person's retirement.

Vesting stage

Once the individual retires, he gets a steady flow of income for the rest of his life. Any pension product must perform the following five core functions with a reasonable degree of competence and efficiency.

Reliable collection of contributions, taxes and other receipts (including any loan payments in the security systems);
Payment of benefits for each of the schemes, in a timely and correct way;
Securing financial management and productive investment of pension fund assets;

Different Types Of Pension Schemes

Some of the different types of Pension schemes that are prevalent

Employees Provident Funds Scheme

This mandatory pension scheme for the private sector is managed by the Employees' Provident Fund Organisation (EPFO).
Set up :1952
Covers employees in specified economic sectors at firms with more than 20 employees.
It is a statutory body under the Ministry of Labour, GOI,
Responsible for regulation and management of provident funds in India.
The EPFO administers the mandatory provident fund, while outsourcing the management of the scheme's assets to fund managers. Traditionally, assets have been managed by PSU banks. Employers can be exempted from participation, if their pension plans provide at least the same level of benefits (see Exempted Funds).
Taking into account the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, the schemes of EPFO are administered by a tri-partite board called the Central Board of Trustees.

The board comprises representatives of the

Government (both Central and State),
employers, and employees.
Chaired by the Ministry of Labour and Employment, Government of India.

The EPFO operates the following three major schemes:

Employees' Pension Scheme (EPS),
Employees' Deposit Linked Insurance Scheme (EDLIS) and
Employees' Provident Fund Scheme (EPF).
All the three schemes are mandatory for employees.
EPFO assists the Central Board of Trustees (EPF) in the administration of a provident fund scheme, pension scheme and an insurance scheme for the registered establishments in India and includes employees of such establishments and international workers who are covered.

EPFO's functioning includes:

Enforcement of the Act across the country
Maintenance of individual accounts
Settlement of claims
Investment of funds
Ensuring prompt pension payment
Updating records

Benefits of EPF

High Interest – An individual gets an interest rate of 8-9 per cent on the EPF balance held in the account. Currently, the interest rate in India is 8.10 per cent for the financial year 2021-22. This high rate of interest facilitates retirement planning.
Exemption from Tax – EPF falls under the EEE (Exempt Exempt Exempt) category. That is, the money invested in EPF, the interest that is earned, and the money that is withdrawn – are all exempted from payment of income tax. (Note – If one withdraws money in case of emergencies before a specified period of 5 years, there will not be any exemption from tax).
Low Risk – EPF is an extremely low-risk investment. Hence, it gives the individual a safe option to invest his money with the added advantage of government backing.
Life Insurance– EPF also acts as life insurance. In case of death of the employee, the corpus goes to the family of the deceased.
Hassle-free – Owing to the UAN, an employee needs to open an EPF account only once and then, it can be transferred to his subsequent employers.

Public Provident Fund (PPF) Scheme

Launched by the National Savings Institute and is one of the post office savings schemes.
PPF is one of the popular government investment instruments.
The lock-in period is 15 years for a PPF, and one can extend their investment in PPF for another five years.
Eligible for a tax deduction.
Investments up to Rs 1,50,000, can be claimed for tax deduction under Section 80C of the Income Tax Act.
Moreover, returns from PPF are completely tax exempted.
Minimum investment each year: Rs 500
Maximum investment is: Rs. 1,50,000.
Investors cannot open multiple accounts.
The interest is compounded annually.
Can be deposited in the form of a lump sum amount or in instalments, up to 12 instalments, per financial year.
Any Indian citizen can avail the benefits of this savings plan.
NRIs and HUFs are not eligible to open a PPF account.
Additionally, investors can avail a loan against PPF investments, and such loans can be availed between the 3 and the 15 year.
As PPF has a lock-in period of 15 years, their benefits can be reaped during retirement, by the investors.

Insurance Annuity Schemes

The term annuity simply means a regular and periodic payment.
Insurance companies pay pension annuities to individuals (annuitants) or their dependents after their death, over a number of years (term), in return for money paid earlier to the insurance company, either in a lump sum or in instalments.
Annuities start where life insurance ends. It is called as the reverse of life insurance.
Annuity stops upon death of a person, whereas theoretically, life insurance starts on the death of the assured.

Annuities are of two broad types

Immediate Annuity

Immediate Annuity begins at once.
Immediate annuity is purchased with a single premium called purchase price.
This type of annuity is typically purchased, when a person reaches retirement age and has a lump sum to invest.
In the event of unfortunate death of the person buying annuity during the term, his/her legal heirs or nominees shall get the remaining instalments of the annuity.

Deferred Annuity

Under a deferred annuity plan, the annuity payments to the annuitant commence at some specified time or specified age of the annuitant. This type of annuity can be funded either by a single payment or a series of regular payments.

National Pension Scheme (NPS)

The National Pension Scheme is a social security initiative by the Central Government.
This pension programme is open to employees from the public, private and even the unorganised sectors.
Employees of the armed forces are, however, excluded.
The scheme encourages people to invest in a pension account, at regular intervals, during the course of their employment.
After retirement, the subscribers can take out a certain percentage (up to 60%) of the corpus.
As an NPS account holder, the subscriber will receive the remaining amount, as a monthly pension, during the post-retirement period.
Now, as per PFRDA guidelines, it is open to all the Indian citizens, on a voluntary basis
The scheme is portable across jobs and locations, with tax benefits, under Section 80C and Section 80CCD of the Income Tax Act.
Administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA), set up under the PFRDA Act, 2013.
NPS is a market linked, defined contribution product.
Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA), for individual subscriber.
NPS offers two types of accounts, namely Tier-I and Tier-II.
Tier-I account is the pension account having restricted withdrawals.
Tier-II account is a voluntary account, which offers liquidity of investments and withdrawals.
It is allowed only when there is an active Tier-I account in the name of the subscriber.
The contributions accumulate over a period of time; till retirement the contributions made to the fund grow with market linked returns.
NPS platform offers different models to suit the different segments of users.

Tax Benefits available under NPS

Own Contribution towards NPS Tier-I is eligible for tax deduction, under section 80 CCD (1) of the Income Tax Act, within the overall ceiling of Rs. 1.50 lakhs, under section 80 C of the Income Tax Act. From FY 2015-16, the subscriber is also allowed an additional tax deduction of Rs 50,000 maximum, under section 80CCD 1(B) of the IT Act
Employer's contribution towards NPS Tier-I is eligible for tax deduction under Section 80CCD (2) (14% of salary for Central Government employees and 10% for others). This rebate is over and above the limit prescribed under Section 80C
Interim/Partial withdrawal up to 25% of the contributions made by the subscriber from NPS Tier-I is tax free.
With effect from 1 April, 2019, lump sum withdrawal up to 60% of total pension wealth from NPS Tier-I at the time of superannuation is tax exempt.

Atal Pension Yojana (APY)

Focus: Unorganised sector workers
Minimum guaranteed pension of Rs. 1,000 or Rs. 2,000 or Rs. 3,000 or Rs. 4,000 or Rs. 5,000 per month will start after attaining the age of 60 years, depending on the contributions made by the subscribers for their chosen pension amount.
Any citizen of India, including an NRI, is eligible to join the APY scheme.

Eligibility criteria:

Age: between 18 - 40 years.
He/ She should have a savings bank account/ post office savings bank account. In case, the person does not have a savings account, he/she should approach a bank branch/post office to open a savings account.

Taxation Benefits

Under APY Under Section 80CCD (1) of the Income Tax Act, investment in APY up to Rs 1.5 lakhs, qualifies for income tax deduction.
It should, however, be noted that the total amount of deductions under sections 80C, 80CCC and 80CCD under the Income Tax Act, cannot exceed Rs 1.5 lakhs.
In addition, an investment up to Rs 50,000 in the APY is deductible from taxable income, under Section 80CCD (1B) of the Income Tax Act, 1961.

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JAIIB PAPER 1 IE & IFS Module D Unit 15 (Ambitious Baba)