SUPERANNUATION POLICIES

Introduction

Superannuation refer to a pension granted upon retirement In general, a pension is an

arrangement to provide people with an income when they are no longer earning a regular

income from employment Retirement plans may be set up by employers, insurance

companies, the government or other institutions such as employer associations or trade

unions.

Superannuation is a retirement Benefit by employer. It is a contribution made by

employer each year on your behalf towards the group superannuation policy held by the

employer. This is an important part of creating wealth for your retirement.

Superannuation Fund is a retirement benefit given to employees by the Company.

Normally the Company has a link with agencies like LIC Superannuation Fund, where

their contributions are paid. The Company pays 15% of basic wages as superannuation

contribution. There is no contribution from the employee. This contribution is invested by

the Fund in various securities as per investment pattern prescribed. Interest on

contributions is credited to the members account. Normally the rate of interest is

equivalent to the PF interest rate.

On attaining the retirement age, the member is eligible to take 25% of the balance

available in his/her account as a tax free benefit. The balance 75% is put in a annuity

fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity

returns depending on the option exercised by the member.

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LIC superannuation scheme -- Retirement benefits for corporate employees

The term `superannuation' refers to a person reaching the age of retirement. While the retirement

age is fixed at 55 in certain private companies, 58 is more common. A few years ago, the Centre

raised the retirement age of its employees from 58 to 60. A number of State governments too

followed suit, though some retained it at 58.

This article considers the superannuation scheme introduced by the Life Insurance Corporation.

It is a non-contributory scheme for the employees which mean only the employers contribute.

The scheme operates under a master policy issued by the LIC, and t he employer is liable to pay

a certain percentage of the salary as premium every year. The premium may range from 5 per

cent to 15 per cent and the employer may opt to pay the same percentage for all its employees or

pay different percentages for different nt categories of employees.

For instance, a company may decide to pay the same percentage, say, 15 per cent, for all its

employees. Or, it may pay 6 per cent premium for its supervisory staff and 15 per cent for its

managerial cadre.

Two `Master Policies' have been introduced by the LIC: The Deferred Annuity Scheme and the

Cash Accumulation Scheme. The former is less beneficial than the latter, under which, the

contribution by the company on each renewal date would be accumulated at the rates of interest

declared by the LIC from time to time.

Such interest rates would be higher than those under the deferred annuity scheme. Moreover, the

benefits would be passed on to the members of the scheme without any administrative charge

being levied.

Further, on leaving the services of the company, whether by resignation or retirement, various

options are available to the annuitants. In the event of the death of a member while in service, the

nominee would become eligible for the pension benefits.

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The various options available are

A Getting the full corpus amount in a lump-sum subject to deduction of income-tax, if

applicable. However, certain companies would incorporate certain restrictions in their

superannuation scheme rules.

For instance, a member may be eligible to draw pension only on completing a specified period of

service, say, 5 years. Alternatively, the members may be allowed to avail pension benefits

irrespective of their service as given below:

Less than 3 years: 25 per cent of corpus fund;

3-5 years: 50 per cent;

5-10 years: 75 per cent; and

Above 10 years: 100 per cent.

The unsettled amount shall be returned to the trust by the LIC and the amount may be used by

the trustees for for future premium payments.

Retaining the entire corpus amount till normal retirement date (that is, up to 55 or 58 years as the

case may be) and start getting pension benefits thereafter;

Getting pension on the total corpus (without getting any commutation) on a monthly/quarterly

basis;

Getting one-third commutation value of pension corpus amount (maximum limit allowed under

the I-T Act in normal circumstances) immediately and get the pension out of the balance corpus

amount monthly/quarterly.

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In the latter two cases, members may opt for the return-of-the-capital scheme, under which the

annuitant will start receiving the monthly or quarterly pension subject to the assurance that in the

event of the death of the annuitant, the corpus amount at the time of getting the first installment

of the pension would be returned to the annuitant's nominee.

Here, again, the original pension corpus amount would be treated as an ordinary endowment

policy and bonus declared by the LIC for those years (intervening period) would be added and

returned along with the corpus amount. This can be explained as in the t able.

Any amount received as pension before the normal retirement date would be taxable as salary

income under Section 17(1)(ii) of the I-T Act, 1961.

However, under Section 1O(10A)(ii) of the Act, any payment of commutation of pension

received under any scheme of any other employer, to the extent it does not exceed in a case

where the employee receives any gratuity, the commuted value of the one-third pension he is

entitled to and, in any other case, the commuted value of one-half of such pension.

Therefore, it is suggested that pension benefits be availed after the retirement date in the normal

circumstances. However, it varies on a case-to-case basis as, in the case of death, the nominee of

the deceased member can opt only for pension for life a nnuity with the return of capital on

death. Here, again, the pension value depends on the corpus amount and the age of the

beneficiary, and so on, at the time the beneficiary starts to receive the pension.

Further, wherever the scheme permits a certain percentage of withdrawal in lumpsum (say, 25

per cent, 50 per cent, 75 per cent and 100 per cent, as the case may be) which may depend on the

length of service, it is advisable to take the full amount of pen sion after considering the tax

implications.

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Superannuation Scheme Provided by LIC:

The employer contributes a certain fixed percentage of salary of each member. Such

Contributions are accumulated by LIC and the accumulated amount is utilized to provide various

benefits as mentioned below.

BENEFITS:

1) ON RETIREMENT:

On Retirement of a member, the corpus (contributions plus interest) is utilized to provide the

pension as per his choice.

2) ON DEATH:

The Pension is payable on the life of the beneficiary. Corpus is utilized towards the payment of

pension of the type the beneficiary may opt and the benefit so received is tax free. A lump sum

payable by way of death besides the pension, if the employer has taken Group Insurance Scheme

in conjunction with the Group Superannuation Scheme.

3) ON WITHDRAWAL:

He can get the equitable interest transferred to the Superannuation Scheme of the new

employer or opt for immediate or deferred pension.

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PENSION OPTIONS PROVIDED BY LIC:

1. Life Pension ceasing at death.

2. Life Pension with Return of Capital and Group Pension Terminal Bonus on death.

3. Life Pension guaranteed for 5,10,15 or 20 years and life thereafter.

4. Joint Life Pension payable on the last survivor of the employee and spouse.

5. Joint Life Pension payable to the last survivor of the employee and spouse with return of

capital on the death of the last survivor. If desired , 1/3rd of the pension can be commuted

at vesting.

ELIGIBILITY CONDITION :

It is not obligatory or statutory on the part of the employer to provide for pension to all

employees. It is entirely upto him to decide to which class/ classes of employees he desires to

extends the scheme. The eligibility conditions may be defined on the basis of designation or

salary. (However, after the categories are specified, employer cannot discriminate between the

employees and thus extends the scheme uniformly).

CONTRIBUTION:

The maximum annual contribution that an employer can make to the Pension Fund and Provident

Fund is restricted by the Income Tax Provisions to 27% of the annual salary (basic plus D.A.)

The annual contributions are treated as deductible business expenses.

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WHO PAYS CONTRIBUTION?

Mostly the employer contributes, but is so desired, both the employer and the employees may

contribute, in which case the scheme is called a Contributory Pension Fund Scheme.

TAX BENEFITS:

The provisions relating to the approved Superannuation Scheme are set out in Part 'B' of the

Fourth Scheme of the Income-Tax Act, 1961 and Part XIII of the Income Tax Rules , 1962. The

income tax concession will be available only if the scheme is approved by the CIT.

1. The annual contribution is treated as a deductible business expense in term of Section

36(1) (iv) of the I.T. Act.

2. In terms of a Notification issued by the Central Board of Direct Taxes .80% of the

contribution (s) towards the past service liability are treated as deductible business

expenses spread over in the subsequent years of payment.

3. The employee's contribution , in the case of the Contributions scheme qualifies for

exemption under Section 80C of the Income-Tax Act.

GROUP INSURANCE SCHEME IN CONJUNCTION WITH SUPERANNUATION

SCHEME:

The members of the Group Superannuation scheme can be covered under Group Insurance in

conjunction with superannuation scheme so as to provide death risk cover while in service

subject to certain conditions.

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TWO TYPES OF BENEFITS

ADVANCE FIXATION OF BENEFITS AND MONEY PURCHASE SCHEME.

EVERY COMPANY IS SUBSCRIBING TO MONEY PURCHASE SCHEME (WITH THE FIXED PERCENTAGE OF CONTRIBUTIONS PER MONTH TRANSFER FROM PREVIOUS EMPLOYER CAN ALSO BE RECEIVED (TAX FREE).

TRANSFER TO OTHER'S TRUST CAN ALSO BE PAID (TAX FREE).

NEW EMPLOYER CAN HAVE MINIMUM MANDATORY SERVICE CLAUSES FOR THEIR OWN CONTRIBUTION BUT THEY CANNOT TOUCH PREVIOUS TRANSFERRED FUNDS.

15% CONTRIBUTION TAX FREE IS THE BIGGEST TOOL OF TAX PLANNING.

EMPLOYEES IN THE HIGHEST BRACKETS ARE MOST BENEFITED. NOT ONLY CONTRIBUTION IS TAX FREE BUT THE INTEREST @ 12% IS TAX FREE. 12% TAX FREE INTEREST IS EQUAL TO 18% TAXABLE INTEREST.

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Rules of Superannuation on Maturity

• Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension.

• He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.

• Accounts with Small Sums of Money Some special accounts can hold superannuation money but are not really Superannuation funds, these include: Retirement Savings Account (RSA) and the Superannuation Holding Account Reserve (SHAR). These are used when an employer cannot find a superannuation fund that will accept small sums of money.

• Access to superannuation Strict government rules prevent early access to preserved benefits except in very limited and restricted circumstances, including severe financial hardship or on compassionate grounds, such as for medical treatment.

• Preservation Age Preservation age is the age at which a person may access their superannuation balance. Your preservation age depends on your date of birth. Born Between Preservation Age Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July 1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 After 30 June 1964 60

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Conclusion

Its provides an opportunity to examine the retirement accumulations of those who report

having superannuation schemes, either workplace or personal schemes. Workplace

schemes are defined in the HSS as those involving an employer contribution. For those

who had joined a workplace some time ago, it is possible that membership was

compulsory. However that is no longer typically the case.

For both individuals and couples, it appears that those who belong to a workplace

superannuation scheme have a considerably higher level of net worth. However, for

personal schemes, the difference in net worth between holders and non-holders

becomes statistically insignificant once such socio-economic variables as age, gender,

education, region of residence, income, main source of income, and so on have been

accounted for.

A formal was made of the relationship between the value of holdings in a

superannuation scheme and the value of net worth in other forms of saving. It is

possible that where a person has chosen to participate in a workplace scheme, they

would regard their saving in this scheme as a substitute for other forms of saving. In

fact, in the limit, there could be perfect substitution, whereby for every additional rupees

held in the workplace scheme, one less rupees would be held in other vehicles. A less

extreme case could involve partial substitution, and finally there might be

complementarities. In this latter case, the individual would hold more in other vehicles

as well as increased holdings in a workplace scheme.

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Bibliography

www.slideshare.com

Wikipedia

www.Managementpradise.com

Books

Internet

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