NPS is the National Pension Scheme offered by the PFRDA (Pension Fund Regulatory and Development Authority) and the Government of India. Initially, just for government employees, the pension plan was opened to all citizens on a voluntary basis. It acts as a stable saving for your retirement and requires that you contribute to your NPS fund till the age of 60. After that, the entire corpus (amount accumulated + interest) is there to support you when you are retired.
What is Annuity in NPS?
The NPS scheme does not allow you to withdraw the entire amount upon maturation/retirement. Instead, up to 60% of the total corpus can be withdrawn when you retire. The remaining 40% of your corpus needs to be used to buy an annuity scheme from a registered Annuity Service Provider (ASP). ASPs are empaneled by the PFRDA and hence considered safe and legitimate institutions for reinvesting your money. The annuity also simultaneously pays out a fixed amount to you on a yearly basis or to your spouse upon your death.
Annuity Plan Features
Few are aware of the fact that the government backs such a retirement tool. This factor grants the NPS a certain stability that most other financial tools do not possess. The annuity policy of the NPS safeguards your hard-earned retirement savings so that you have a steady income in your old age. Here are a few key features of the annuity plan in the National Pension Scheme:
- The minimum amount of your corpus that you have to invest in an annuity scheme is 40%. You can choose to invest a higher percentage if you are happy to accept a lower lump sum withdrawal when you retire.
- You need to wait till you are 60 years old before you can withdraw the corpus amount. If you wish to surrender before you reach 60, then you can access only 20% of the corpus (the remaining 80% will be invested into an annuity).
- There are several types of annuity schemes to invest in, ranging from those that pay out during your entire life to those that pay during your entire life + to your spouse after your death and similar variations.
Benefits of Annuity Policy in NPS
The obvious benefit is that instead of just having a very large sum of cash when you retire, a fixed percentage of your savings is reinvested to ensure you get future annuity payments. Keep in mind that although you are setting aside a minimum of 40%, due to the annuity also being invested, the value of 40% can increase significantly.
- Receiving the entire 100% corpus and then making a financial mistake can leave your retirement payments in a risky position. The benefit of an annuity plan ensures that you have a stable source of monthly income for the rest of your life even if you mishandle the withdrawn lump sum amount. Elderly people may not always be the best at managing financial tools, and improper management can lead to your vital savings being invested in places where there isn’t any profit. While you are free to do whatever you want with up to 60% of the corpus, the minimum 40% for the annuity scheme acts as a safety net.
- Annuity schemes in NPS do not have any investment cap, unlike other investment tools in pension plans for retired folk.
- As of 2021, the Union Budget has stated that the entire corpus amount (lump sum withdrawal + annuity earnings) is free from any tax burden. Earlier, only the withdrawal amount was tax-free, but now you do not need to pay tax on any part of your NPS corpus.
- In case you need to urgently make a withdrawal, you can claim up to 25% of the amount paid as long as you have been invested for 3 years or more. The reasons for withdrawing early need to meet certain criteria, like a child’s wedding, buying a house or medical treatment.
Q1. What is a pension annuity?
A pension annuity is a fixed amount of money to be paid to the policyholder as a form of retirement payments.
Q2. What is the annuity rate in NPS?
Under the National Pension Scheme, the minimum rate you need to put towards your annuity scheme upon retirement is 40% of the corpus. You may withdraw the remaining 60% and use it as you wish, tax-free. You can also choose to invest more than 40% of the corpus as per your preference.
Q3. What are the types of annuity in NPS?
The types of annuity in NPS are as follows:
- Annuity paid for the entire remainder of your life
- Annuity paid for your life + paid to your spouse after your death
- Annuity paid for your life and the purchase amount returned when you die
- Annuity paid for your life + paid to your spouse, then purchase price returned when the spouse passes away
- Annuity paid for your entire life, then the entire subsequent survivors with the purchase price being returned to a nominee or child at the end
Fill out the form below to see what kind of annuity you may be able to get based on your contributions and other factors. Keep in mind that you are free to choose a different fund manager for your annuity investment if you are not satisfied with the performance of your current plan.