Annuity in NPS

What is Annuity in NPS?

An annuity in NPS is a regular income you receive after retiring. It is a key feature of the National Pension System (NPS) designed to provide financial security during your retirement years. Here is how it works:

When you invest in ​​smart pension plans, you accumulate a retirement corpus over time. In the case of NPS, you must invest at least 40% of this corpus into an annuity plan at retirement. You then continue to receive a steady income stream for the rest of your life or as per the terms of the annuity plan you choose.

It is important to note here that the regular annuity payout will depend on the amount that you have invested over the years and the interest rate set by the government. You can also determine the annuity amount using an ​​annuity calculator and plan your post-retirement expenses accordingly.

Let us know how NPS annuity works using an example. Suppose Mr. Kumar will retire at 60 and will have a total NPS corpus of ₹1 crore.

• Lump-Sum Withdrawal (60%): He is allowed to draw a maximum of 60% of the corpus, which is ₹60 lakh. This will be entirely tax-free, and he can do anything with this, like purchase a home, fund his children's marriage, or have an emergency backup.
• Annuity Purchase (Minimum 40%): He must use the remaining 40%, which is ₹40 lakh, to buy an annuity plan from an Annuity Service Provider of his choice.
• Receiving Pension: Assuming the NPS annuity rate provided by the insurer is 6% per annum, Mr. Kumar will begin to receive a pension of ₹2,40,000 (6% of ₹40 lakh) per annum, and that would mean he will be earning a monthly pension of ₹20,000 for the rest of his life.

How to Buy an Annuity from NPS?

The first requirement to purchase an annuity from NPS is that you must formally close your pension account. Depending on your exit type (retirement, early exit, or death), a part of your savings must be used to buy an annuity.

This is how it works in the simple steps:

• Step 1: Exit from NPS through the official process.
• Step 2: Choose an annuity service provider, which is approved by PFRDA.
• Step 3: Select the annuity plan that suits your needs.
• Step 4: Complete KYC (Know Your Customer) requirements.
• Step 5: The chosen part of your NPS savings is transferred to the insurer, and your annuity starts, giving you regular income for life.

The final annuity amount depends on market returns and the plan you select.

Types of Annuity Investment Plans in NPS

• Annuity for Life: It is an annuity with a fixed pension that the annuitant will enjoy throughout their life.
• Life with 100% Annuity to Spouse: In this annuity plan, you receive a lifetime pension, and after your death, your spouse still continues to receive the same amount.
• Life with Return of Purchase Price: This is a type of pension that is paid till the death of the annuitant, and on the death of the annuitant, the amount of purchase (the corpus that was used to purchase the annuity) is given back to the nominee.
• Life with 100% Spouse Annuity plus Return of Purchase Price: You and your spouse both get the pension. After both pass away, the purchase price is given back to the nominee.

You can also get additional benefits, such as adding parents or other members of the family, although this is dependent on the insurer you choose. Also keep in mind, NPS does not permit quarterly or yearly payouts of the annuity; only monthly payouts are offered.

Features of Annuity in NPS

The features of an NPS annuity are important to know to choose an appropriate ​​retirement plan, making a wise decision. The right decision can have a huge influence on your financial welfare in your post-retirement years.

Mandatory Purchase for Lifelong Pension

The major feature of the NPS arrangement is the compulsory annuity of a portion of your holdings. On maturity (age 60), you will have to invest at least 40% of your total corpus in purchasing an annuity plan. This law ensures a disciplined approach for developing a lifelong pension along with preventing the entire corpus from being used as a lump sum, thereby securing your future.

Choice of Annuity Service Providers (ASPs)

Subscribers are not tied to a single provider. There are a number of high-profile insurance firms empaneled by the PFRDA as Annuity Service Providers. This gives you the flexibility to search and compare different insurers. You can compare the rates they offer in terms of their annuities, quality of service, and even reliability before settling on the one that fits your needs.

Variety of Annuity Payout Options

Annuity plans in NPS offer several payout options to cater to different individual and family needs. Common options include Annuity for Life, Joint Life Annuity, and Annuity with Return of Purchase Price (ROP).

Taxable Income Stream

Although the NPS offers tax exemptions during the accumulation phase and at the withdrawal point, 60% of the corpus is tax-free, and the amount of pension you will get from the annuity is treated as income. This monthly pension amount will be included in your total monthly income for the year and will be taxed according to the applicable income tax slab.

Benefits of Annuity in NPS

Annuity in NPS offers several benefits that contribute to financial security and stability in retirement. Let us take a look:

Better Money Management

Annuity in NPS plans allows retirees to have a predictable and constant stream of income, thus making it easier to manage your money during your retirement years. With this constant payout structure, you can manage your expenses in a better way, ensuring that you have a reliable income to cover living costs.

No Reinvestment Risk

Unlike lump-sum withdrawals or other ​​saving plans where retirees may need to reinvest funds to generate income, an annuity in NPS eliminates reinvestment risk. Once purchased, ​​annuity plans guarantee a regular income stream without the need for you to manage or reinvest your retirement savings actively, reducing the complexity and potential pitfalls.

No Cap On Investment

Annuities in NPS plans do not have a cap on investment amounts, allowing retirees to allocate a significant portion of their retirement corpus to secure a steady income stream. This lack of investment cap provides flexibility for you to choose the annuity plan that best suits your financial needs and preferences.

Annuity in NPS offers a secure and reliable way to convert your retirement savings into a steady stream of income. Here are some of the key features of annuity in NPS:

Guaranteed Income

An annuity in NPS offers a fixed and regular income stream throughout your retirement, mitigating the risk of outliving your savings. This predictable income makes budgeting and financial planning easier.

Minimum Investment

You are mandated to invest a minimum of 40% of your accumulated NPS corpus in an annuity plan upon exiting NPS. This ensures a portion of your savings is dedicated to generating regular income.

Choice Of Annuity Plans

NPS offers various annuity options with different payout structures. You can choose a plan that prioritizes lifetime income for yourself, income for your spouse after you are gone, or even a return of your initial investment amount to your nominee.

Flexibility In Investment Amount

There is no upper limit on how much of your remaining 60% corpus you can invest in an annuity for a higher monthly payout.

Tax Benefits

A portion of the annuity payout is tax-free. At retirement, 60% of the corpus withdrawal is tax-exempt, and annuity payouts are partially tax-free as well. Your annual premium payments are also eligible for deductions under Section 80C.

Factors Affecting Annuity Rates in NPS

Annuity rates in NPS do not stay the same forever; they can go up or down based on a few key things. If you are wondering how much annuity in NPS, it is important to understand the factors that affect it:

Market Situation

If interest rates in the market are high, annuity rates also tend to be better because providers can earn more from your investment. But if interest rates are low, annuity rates may drop too.

Type Of Annuity Plan

Not all annuity plans are the same. Fixed annuities give you a guaranteed return, while variable and index-linked plans can change based on market performance. So, the type of plan you choose directly affects your returns.

Provider’s Policy

Different annuity providers offer different rates. Some may offer better perks like flexible withdrawals or inflation protection, while others may focus on steady income. That is why it is smart to compare options before you choose.

Even though annuity rates in NPS are usually competitive, they can still change based on these factors. So, keeping an eye on market trends and talking to a financial expert can help you make the best choice for your retirement.

What Happens to Annuity NPS after it is Matured?

After an annuity plan in the National Pension System (NPS) matures, the annuitant (the person who purchased the plan) starts receiving regular payments according to the chosen payout option. These payments continue for the duration specified in the annuity contract, which could be for the lifetime of the annuitant or for a specific period (e.g., 5 years, 10 years, or more). The annuity payments provide a steady income stream to the annuitant during their retirement years, ensuring financial security and stability.

To avoid any misunderstanding or confusion, you should carefully review the terms and conditions of the annuity contract, including fees, charges, surrender penalties, and any optional features or riders.

What are the Prerequisites for NPS Exit?

In any circumstance, if you want to exit NPS, you will need to fulfill certain conditions. Let us take a look at those conditions:

Claim ID For PRAN

You will need your Permanent Retirement Account Number (PRAN) to initiate the exit process. This is a unique identification number assigned to you upon NPS account creation.

FATCA Compliance

The Foreign Account Tax Compliance Act (FATCA) applies only to US citizens or residents residing in India. If you fall under this category, you may need to submit additional FATCA-related documents during the exit process.

OTP Authentication/E-Sign Using Aadhaar

Aadhaar OTP authentication might be used as a part of the online exit process for added security. However, it is not the sole method, and other verification options may be available.

What are the Different Exit Types Under NPS?

Under the NPS, there are different exit types available depending on the circumstances of the subscriber:

Superannuation Exit

This is termed the normal exit and occurs at the time of superannuation or when you reach the retirement age of 60. At this point, you must use at least 40% of your accumulated corpus to buy an annuity plan. You can withdraw the remaining amount as a lump sum. If your total corpus is less than ₹5 lakh, you can withdraw the entire amount as a lump sum.

Premature Exit

A premature exit from the NPS can occur when you opt to exit the system before reaching the eligible retirement age for various reasons, such as resignation, termination of employment, or financial hardship. If your corpus is ₹2.5 lakh or less, you can withdraw the entire amount as a lump sum. If your corpus is more than ₹2.5 lakh, at least 80% of your accumulated corpus must be used to buy an annuity, and the remaining 20% will be given to you as a lump sum.

Exit Due To Death

Exit due to death applies in the unfortunate event of your passing during the accumulation phase of the NPS. Depending on whether you are a government or non-government employee, different procedures and benefits apply to settling the accumulated corpus to your nominee or legal heirs.

How can You Initiate an Online Withdrawal Request?

To initiate an online withdrawal request from your NPS account, you must fulfill certain eligibility requirements. This method is only available if you meet the general NPS exit requirements (like reaching 60 years of age) and have your contact details (mobile number and email ID) registered with your NPS account. Your Aadhaar must also be linked to your CRA account, and the registered mobile number must match the Aadhaar-registered number. The process for requests is as follows:

• Visit the Central Recordkeeping Agency (CRA) website.
• Log in using your PRAN and password.
• Under the “Transact Online” tab, select “Withdrawal.”
• You will see an option for “Partial withdrawal from Tier-I” (if applicable) and “Exit from NPS” (for complete withdrawal). Choose the appropriate option.
• The system will guide you through further steps, which may involve confirming your PRAN, selecting the withdrawal reason (if applicable), and choosing an annuity plan (if exiting completely).
• Verify the request sent to your registered mobile number or email ID using OTP or eSign.

Wrapping it Up

Understanding what is annuity plan in NPS is crucial for planning a secure retirement. An annuity ensures a steady income flow post-retirement, with various types available to cater to different needs. The benefits of annuity in NPS include better money management, no reinvestment risk, and no cap on investment, providing you with financial stability and peace of mind. Furthermore, you can use the ​​NPS calculator to get estimates of your pension corpus and monthly installments. This will also help you choose the best annuity plan for NPS.

FAQs on Annuity in NPS