What Is Vesting Age In Pension Plans?

In pension plans, the term vesting age refers to the age at which an individual becomes entitled to receive the benefits from a pension scheme. This is typically linked to the period of time an employee has contributed to the pension fund. The concept of vesting is crucial because it determines when a person can access their pension funds or benefits upon meeting certain criteria, such as a minimum number of years of service.

What Is Vesting Age In Pension Plans?

Definition of Vesting Age:

Vesting Age is the age at which an employee becomes eligible to receive pension benefits after a certain period of service or contribution to the pension plan.

In other words, it is the age at which the employee vests or has a right to the pension benefits that are due to them, even if they leave the employer before reaching the retirement age.

Vesting Period vs. Vesting Age:

Vesting Period refers to the number of years an employee needs to stay with the employer or contribute to the pension scheme before they gain the right to the pension. For instance, a common vesting period in India is 5 years of continuous service.

Once the employee has completed the vesting period, they become vested, meaning they are entitled to the pension, even if they decide to leave the company before reaching the age of retirement.

Impact of Vesting Age on Pension Eligibility:

The vesting age often ties to the age at which an individual can start receiving the pension benefits. However, the individual may need to meet other conditions, such as completing the vesting period and remaining with the employer for the required number of years.

For example, in the case of the Employees' Pension Scheme (EPS) under the EPF (Employees' Provident Fund) in India, the vesting age is generally 58 years. This means an employee must contribute to the scheme for at least 10 years to qualify for pension benefits after reaching the age of 58.

Types of Pension Schemes and Vesting Age:

Defined Contribution Pension Plans:

In these plans, the pension is based on the contributions made by the employee and the employer during the individual’s service period. The vesting age is crucial because an individual may need to complete a certain number of years of service to receive benefits.

Defined Benefit Pension Plans:

Here, the pension benefits are based on the employee’s salary and years of service. The vesting age determines when the employee becomes eligible for the defined pension benefit.

National Pension Scheme (NPS):

Under NPS, the vesting age is typically linked to the retirement age (usually 60 years), but the pension can start being drawn after the employee reaches 60 years of age or even earlier, depending on specific conditions.

How Does Vesting Age Work in India?:

In the case of the Employees’ Pension Scheme (EPS) under EPF, employees are eligible for pension benefits if they have worked for at least 10 years with an employer and the scheme is applicable.

If an employee leaves before completing 10 years of service, they are not eligible for the pension, but they can withdraw the pension amount or transfer it to another scheme.

For National Pension Scheme (NPS), the vesting age allows individuals to start withdrawing their accumulated corpus at the age of 60, but the individual can also opt to receive a monthly pension after that age.

Example:

Suppose Mr. Kumar works in a private company and has been contributing to the Employees' Pension Scheme (EPS) for 8 years. According to the rules, he needs to complete at least 10 years of continuous service to be eligible for pension benefits at retirement age (typically 58 years). As Mr. Kumar has not yet met the vesting period requirement, he is not entitled to a pension from EPS. However, if he continues working and reaches 10 years, he would qualify for the pension once he reaches the vesting age of 58 years.

What Happens if You Leave Before Vesting?:

If an employee leaves their job before completing the vesting period, they will generally not be entitled to receive pension benefits under that particular pension scheme. However, depending on the scheme:

• They may be entitled to withdraw the contributions made to the pension fund.
• Alternatively, they may transfer the pension contributions to another pension scheme, such as the National Pension Scheme (NPS) or a new employer’s scheme.

In the case of private pension plans, the vesting age could be flexible, and some plans might allow employees to access their funds or shift the corpus to another scheme even if they leave the job early.

Key Takeaways:

• Vesting age is when an individual gains the right to pension benefits after contributing to the pension scheme for a certain period.
• It is linked to both the vesting period (years of service) and the retirement age.
• If an employee leaves before the vesting period, they may not be entitled to the pension, but they can withdraw or transfer their contributions.
• Each pension scheme has its own vesting rules and conditions, so it's crucial for employees to understand the terms to plan accordingly.

Example:

Mr. Sharma works for a company and has been contributing to the Employees’ Pension Scheme (EPS) for 6 years. The vesting period for EPS is 10 years. Therefore, Mr. Sharma will not be eligible for pension benefits until he completes the 10-year service period. If he leaves the company before reaching 10 years, he will not receive pension benefits but can opt to transfer his accumulated contributions to another scheme.