Annuity in NPS

What are Annuity Plans?

An annuity plan is a financial contract you enter into with an insurance company, known as an Annuity Service Provider, or ASP. You pay a lump sum amount, in this case, at least 40% of your accumulated corpus at retirement, and in return, the ASP promises to pay you a regular, fixed income for a specified period, often for the rest of your life.

You can think of it as a way to convert your retirement savings into a steady pension after you stop working. The primary goal of annuity plans is to provide you with a predictable income stream during your non-earning years, helping you manage expenses and live comfortably without the fear of outliving your savings. They are essentially personal pension plans that you set up with your funds to ensure financial security for your retirement plans.

What is NPS?

The National Pension System (NPS) is a voluntary long-term retirement savings scheme initiated by the Government of India. Its primary objective is to provide every Indian citizen with an adequate retirement income. It is a structured way to systematically save and invest throughout your working life, building a significant corpus for your post-retirement years.

Overseen by the Pension Fund Regulatory and Development Authority (PFRDA), NPS encourages disciplined saving. You make regular contributions, which are then invested according to your chosen investment options. Upon retirement, a portion of this accumulated NPS corpus must be used to purchase an annuity plan. NPS annuity plans are the very mechanism that converts your savings into a regular pension to support you financially when you are no longer earning.

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.

Types of Annuity Investment Plans in NPS

Under NPS, you can choose from different types of annuity plans based on your needs. Here are the main ones:

• Annuity for Life: You get a fixed monthly pension for your entire life, and the payments stop after your death.

• Life with 100% Annuity to Spouse: You get a pension for life, and after your death, your spouse continues to receive the same amount.

• Life with Return of Purchase Price: You receive a pension for life, and after your death, the amount you used to buy the annuity (purchase price) is returned to your 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.

Some insurers may offer extra options, like including parents or other family members, but that depends on the provider. Also, remember NPS only allows monthly annuity payouts, not quarterly or yearly.

How to Buy an Annuity from NPS?

To buy an annuity from NPS, you first need to exit the NPS, which means officially closing 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.

Here is how it works in 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.

How Does the NPS Work?

When you sign up for the National Pension System (NPS), you get a unique Permanent Retirement Account Number (PRAN). This number helps track all your investments in one place. After your PRAN is generated, you will get an alert on your phone and email from the Central Record Keeping Agency (CRA).

You can then start saving regularly into your NPS account during your working years. This money grows over time and becomes your retirement fund. When you retire, you must use at least 40% of this money to buy an annuity, which gives you a steady monthly pension for life.

Who can Join the NPS?

The National Pension System (NPS) is designed to be widely accessible. Here is a quick rundown of who is eligible to become a subscriber:

Indian Citizens

Any Indian citizen, whether a resident, a Non-Resident Indian (NRI), or an Overseas Citizen of India (OCI), can join. You must be between 18 and 70 years of age at the time of joining.

Mandatory for Government Employees

• Central Government: Employees (excluding armed forces) joining services on or after January 1, 2004, are mandatorily covered.

• State Government: Many state governments have also adopted NPS for their employees joining after specific notified dates.

Corporate Sector

Employees of private sector organizations can join if their employer has registered for Corporate NPS. Individuals in the private sector can also join independently even if their employer does not offer it.

This broad eligibility makes the NPA annuity a versatile retirement planning tool for a diverse range of individuals across India.

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 provides retirees with a predictable and steady income stream, facilitating better money management during retirement years. With a fixed or predetermined payout structure, you can plan your expenses more effectively, 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, 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. Here is what really affects them:

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 annuity 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