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How Do Annuity Options Work In NPS

A portion of the pension fund decided by the member (minimum 40% and 80% in the event of superannuation and early withdrawal) is utilized to acquire the annuity from the approved ASP.

  • 3,027 Views | Updated on: Jan 15, 2024

When you retire or close your pension fund under the National Pension System (NPS), you can take up to 60% of your investments, but you must acquire annuity insurance with the remaining 40% according to Pension Fund Regulatory And Development Authority (PFRDA) requirements. It is natural for people to have different perspectives on the importance and significance of annuity options in NPS.

If you were also unaware about Annuity options in NPS, we will help you understand this aspect in a greater detail.

Annuity Options in NPS

An annuity is a form of financial venture that pays fixed and consistent income. These are long-term agreements in which you invest your money in exchange for a monthly payment income from an insurance company.

An annuity is the monthly sum received by the account holder or member from the Annuity Service Provider under NPS. A portion of the pension fund decided by the member (minimum 40% and 80% in the event of superannuation and early withdrawal, respectively) is utilized to acquire the annuity from the approved Annuity Service Providers. Once you withdraw from NPS, Annuity Service Providers are responsible for supplying them with monthly pension payments.

ypes of Annuity Options Under NPS

Annuity for Life

You are eligible to receive a monthly payment for the rest of your life, but you can only do so when you retire. The income from annuity usually stops when the annuity holder dies.

Annuity for Life with Return of Purchase Price On Death

Amounts equal to the initial investment is given to the beneficiary on subscriber’s death in addition to a predetermined sum paid to the subscriber every month. However, the sum of monthly income under these plans are often lower.

Annuity Payment in Full to The Spouse in Case Of The Annuitant’s Demise

An annuity is provided to the spouse when the covered individual dies during their lifetime. If the annuitant’s spouse dies before the annuitant, the annuity payout will come to an end.

Annuity for life with 100% of the annuity payable to the spouse of the annuitant for life on death and return on annuity acquisition:

During the annuitant’s lifetime, the annuity will be paid to the spouse, and the buying amount will be reimbursed to the beneficiary following the annuitant’s death.

Benefits of Annuity Options

Say Goodbye to Reinvestment

If your finances are in a state of disarray in your later years, you may feel overwhelmed. Investing in annuity options at the right time not only ensures a regular income but also eliminates the danger of reinvestment.

Efficient Money Management

Many seniors aren’t financially knowledgeable enough to handle a sizeable retirement fund when they retire. They lack the financial expertise and commitment to create a consistent income from a huge corpus throughout their remaining years. Having a steady, fixed pension income for the rest of one’s life might be beneficial to such people since it eliminates the chance of losing money in later years.

The Tax Play

Many people believe that the taxable amount of annuity pension income under the NPS is a concern. It is true that it is subject to taxation, but it isn’t as hard as many people make it out to be. It’s worth noting that most people’s taxable income in retirement is little. So, even if the annuity pension is taxable, the applicable tax rates are likely to be very low if not zero.

To summarise, annuity is a topic that requires proper in-depth research. Nonetheless, its numerous advantageous features outweigh most doubts that one can potentially have. If you wish to spend your golden years in comfort, annuity choices are worth exploring!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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