Here we will understand structure of a pension scheme. For example, we will first assume some input parameters as below.

Age of Joining: 20 years.          Years of Contribution: 40 years.

Monthly Contribution: Rs.248=00.

Monthly Pension: Rs.5000=00. (After 60 years for life time)

Return Corpus: Rs.8.5 lacs.

How does one decide if this is a good scheme or not? How does one calculate how much return is actually obtained? Here we will try to do the same.

1. As per above, a person with age 20 will have to pay Rs.248 every month for 40 years. After 40 years, when he or she is 60 years old, they will start getting pension of Rs.5000 per month.

Total amount invested by subscriber: 248 x 12 x 40 = 1,19,040. And total corpus: 8.5 lacs.

Sounds simple and interesting?

2. Let us get behind the figures.

When one is investing every month it is a Recurring Deposit which gives us a corpus amount inclusive of interest. For a RD of Rs.248 per month for 40 years, we are getting a maturity corpus of Rs.8.5 lacs. The rate of interest we are getting from RD calculator for this is 7.966%.

Now we invest this corpus of Rs.8.5 lacs to generate a monthly income or pension of Rs.5000 as per scheme. As per MIS calculator, to generate Rs.5000 per month from Rs.8.5 lacs, the rate of interest is 7.06%.

So effectively, the subscriber is first getting 7.996% on RD and then 7.06% on MIS.

Based on above calculation one can take a fair decision if the scheme is really good or not.

Disclaimer: This is a purely imaginary example for mathematical understanding only and makes neither any recommendation nor advice about any real world scheme of any institution.