When planning for retirement, it's important to choose the right savings options to ensure financial security during your golden years. In India, two popular retirement savings options are Superannuation and the National Pension System (NPS). Both these schemes offer tax benefits and are designed to help individuals build a retirement corpus, but they work differently and cater to different needs. In this article, we'll break down the key differences between Superannuation and NPS, helping you understand which one might be better suited for your retirement planning.
 

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What is superannuation?

Superannuation is a retirement benefit provided by employers to their employees. It's a company-sponsored pension plan where both the employer and employee contribute a portion of the employee’s salary towards a retirement fund. The purpose of this fund is to provide a steady income to employees after they retire.
 

Key features of Superannuation:

• Employer contribution: In most cases, the employer contributes a percentage of the employee’s basic salary (typically around 15%) to the superannuation fund. Some plans may also allow employees to contribute voluntarily.
• Types of superannuation: There are two types of superannuation plans:
  1.  Defined benefit plan: The retirement benefit is predetermined based on the employee's salary and years of service.
  2. Defined contribution plan: The retirement benefit depends on the contributions made and the investment returns earned.
• Vesting period: This is the period an employee must work for the company to be eligible for superannuation benefits. It typically ranges from 5 to 10 years.
• Tax benefits: Employer contributions to the superannuation fund are tax-exempt up to Rs. 1.5 lakh per year. The interest earned on the superannuation fund is also tax-free until the withdrawal stage.
   

What is NPS?

The National Pension System (NPS) is a voluntary retirement savings scheme launched by the Government of India. It is open to all Indian citizens and offers an easy and flexible way to save for retirement. NPS is a market-linked scheme, meaning the returns depend on the performance of the underlying investments.
 

Key features of NPS:

• Voluntary contributions: Individuals can contribute to their NPS account as per their convenience, either as a lump sum or in installments. The minimum contribution per year is Rs. 1,000.
• Account types: NPS offers two types of accounts:
  1. Tier I account: This is the primary retirement account with tax benefits. It has a lock-in period until the age of 60.
  2. Tier II account: This is a voluntary savings account with no lock-in period, but it does not offer tax benefits.
• Investment options: NPS allows individuals to choose their investment mix between equity, corporate bonds, and government securities, or opt for an auto-choice where the allocation is adjusted based on the individual’s age.
• Tax benefits: Contributions to NPS are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act, up to Rs. 2 lakh per annum.
• Withdrawal rules: Upon retirement, 60% of the NPS corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase an annuity, which provides a regular pension.

Superannuation vs NPS

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Benefits of superannuation for subscribers

• Defined benefit scheme
  In a defined benefit scheme, the amount you will receive after retirement is predetermined. It is calculated based on specific factors like how much you and your employer have contributed, the number of years you have worked, your age, and gender. This provides certainty about your retirement benefits.
  However, it can be risky for employers because they have to ensure they can meet these fixed payouts, which are calculated using a set formula.
• Defined contribution plan
  In a defined contribution plan, the employer contributes a fixed amount regularly. However, the final retirement benefit depends on how well the investments perform.
  This implies there is more uncertainty for you, as the payout is not fixed and can vary based on market conditions.
   

Benefits of NPS for subscribers

• Flexibility in contributions
  NPS allows you to choose how much you want to contribute and when. You also have the freedom to decide when you want to start receiving the benefits. This makes it a flexible savings option for retirement.
• Balanced risk
  NPS is designed to be relatively low-risk. That is because only up to 50% of your investment goes into equity (stocks), which can offer higher returns but also comes with some risk. The rest is invested in safer options.
  Moreover, you can adjust your equity exposure based on your risk tolerance and the type of NPS account you select.
• Government-regulated transparency
  NPS is regulated by the Pension Fund Regulatory and Development Authority. It ensures that your investments are managed with high transparency. Government involvement gives you peace of mind that your money is being handled properly.
• Potential for higher returns
  NPS has the potential to offer up to 10% annual returns. This impressive return is higher than many traditional investment options like the Public Provident Fund (PPF).
  If you are not satisfied with the returns, you can even switch your fund manager to seek better performance.
   

Conclusion

Superannuation and NPS are both retirement benefit plans. They offer a mix of lump-sum payments and annuity income. However, they differ significantly in terms of tax benefits and returns. With superannuation, you can receive 33% of the fund tax-free upon retirement, while NPS offers a more generous 60% tax-free withdrawal. Additionally, NPS provides higher returns compared to superannuation. This makes it a more attractive option for retirement savings.

Due to these advantages, including better tax efficiency and higher expected returns, many companies and individuals are increasingly favouring NPS over superannuation for their retirement planning needs.

However, considering the differences, you must check your risk appetite and investment horizon to make a wise selection.