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’s how it works:

When you invest in 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 a retirement calculator and plan your post-retirement expenses accordingly.

How to Buy Annuity in NPS?

Buying an annuity in NPS is a straightforward process. It happens when you reach the age of retirement or when you decide to exit the National Pension System. Here is how you can buy an annuity in NPS:

1. Exit the NPS Account: First, you need to exit your NPS account. This happens when you reach the age of 60 or if you wish to exit early under specific conditions (such as superannuation or premature exit). You will need to provide your Permanent Retirement Account Number (PRAN) to initiate the process.

2. Select the Annuity Provider: The NPS allows you to choose an annuity provider from a list of approved insurance companies. You can pick one based on factors like the type of annuity they offer, their payout structure, and their reputation in the market.

3. Invest in Annuity: Once you have chosen the annuity provider, you are required to invest at least 40% of your NPS corpus in an annuity plan. You can choose to invest more than 40% if you want a higher monthly payout.

4. Choose the Type of Annuity: You will be given different options based on your preferences, such as personal pension plans, smart pension plans, and more. Choose the one that fits your retirement goals.

5. Complete the Documentation: After selecting the annuity plan, you must complete some documentation. This includes adhering to KYC norms, submitting identification details, a completed form, and any other paperwork required by the chosen provider.

6. Receive Regular Payments: Once your annuity is activated, you will begin receiving regular payments based on the chosen payout structure. These payments will continue for the duration specified in the annuity agreement.

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, retirees can plan their expenses more effectively, ensuring that they 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 plans eliminate reinvestment risk. Once purchased, annuity plans guarantee a regular income stream without the need for retirees to manage or reinvest their retirement savings actively, reducing the complexity and potential pitfalls.

No Cap on Investment

Annuity 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 retirees to choose the annuity plan that best suits their financial needs and preferences.

What are the Features of Annuity in NPS?

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’re gone, or even a return of your initial investment amount to your nominee.

Flexibility in Investment Amount

There’s 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.

Why Should I Buy an Annuity Plan?

Annuity in NPS plans is a great option for generating reliable retirement income. It offers guaranteed payouts for life, tax benefits under Section 80CCC, and flexibility with various payout options. You can also customize the plan to suit your needs, whether you want immediate payments or prefer to defer them.

What are the Types of Annuity Plans in NPS?

In the NPS, annuity plans are designed to provide a steady income stream to retirees during their post-retirement years. Here are the types of available NPS annuity plans:

Lifetime Income

This option of annuity in NPS offers an annuity for life at a uniform rate. This is the most basic option where you receive a fixed monthly income until your death. There’s no payout to any nominee after you.

Life & Last Survivor With 100% Income

This annuity in NPS provides income for the lifetime of the annuitant and continues to the spouse or another chosen survivor after the annuitant’s death. The survivor receives the same income amount as the annuitant, ensuring financial support for the surviving partner.

Lifetime Income With Capital Refund

With this option, the annuitant receives regular income for life, similar to the Lifetime Income plan. However, in the event of the annuitant’s death, any remaining capital is refunded to the nominee or legal heirs, ensuring that the initial investment is not lost.

Life & Last Survivor With 100% Income With Capital Refund

This plan combines the features of the Life & Last Survivor and Lifetime Income With Capital Refund plans. It provides income for the lifetimes of both the annuitant and the survivor, with the option of a capital refund upon the death of both.

NPS - Family Income

This plan is designed to provide income to the annuitant and their family members. It offers regular payments to the annuitant during their lifetime, and upon their death, the same or reduced payments continue to the spouse or other chosen family members.

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.

Review Contract Terms

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.

For Government Subscribers

If your corpus is ₹5 lakh or less, your nominee or legal heirs can withdraw the entire amount as a lump sum. They can also choose to buy an annuity if they prefer. If the corpus is more than ₹5 lakh, at least 80% must be used to buy an annuity, and the remaining 20% will be given as a lump sum. If there are no dependent family members like a spouse or parents, the 80% annuity must go to your children or legal heirs.

For Non-Government Subscribers

Your nominee or legal heirs will receive the full accumulated corpus, whether you pass away before or after you turn 60. They can choose to purchase an annuity if they wish.

How Can You Initiate an Online Withdrawal Request?

To initiate an online withdrawal request from your NPS account, you must fulfill certain eligibility. 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 request 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 retirees with financial stability and peace of mind.

FAQs on Annuity in NPS