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Annuity in NPS

National Pension System (NPS) is a retirement-oriented savings scheme that helps you secure a steady stream of income once you retire. 

 

You make regular contributions to NPS through your working years. At retirement, you get part of your NPS corpus as a lump sum. The other part, at least 40% of your NPS corpus, is used to purchase an annuity plan. 

 

Are you wondering what is annuity in NPS? Annuity is the component of your NPS investment that gives you regular income post-retirement. If you are interested in NPS, you should learn about annuity in NPS, as investing in an annuity is mandatory. 

 

Here are the essential points to note about NPS annuity

What Happens to NPS at Maturity?

Your NPS matures when you turn 60. Until this time, you continue to make contributions to your account. When your NPS matures, at least 40% of the NPS corpus must go towards the purchase of an NPS annuity plan. 

 

The remaining 60% is what you obtain as a lump sum. You can allot more than 40% of the NPS corpus for the annuity plan, but it is not mandatory to do so. All of this is in case of a normal exit at 60 years or beyond or due to superannuation. 

 

The NPS annuity rules are slightly nuanced. For instance, even in case of normal exit, if your NPS corpus does not exceed ₹5 Lakhs, you can go for 100% lump sum withdrawal. Further, in case of premature exit or voluntary retirement, you must invest 80% in an NPS annuity if your corpus exceeds ₹2.5 Lakhs.

 

Remember that a significant portion of your NPS corpus will go towards one of the eligible NPS annuity plans at maturity. Up to 40% of the lump sum you take back is tax free.

What is Annuity in NPS?

Annuity refers to the regular income or monthly payment you receive from your annuity plan. Your annuity depends on factors such as:

 

  • The NPS annuity rate or expected return of annuity

  • The percentage of the corpus allotted towards the NPS annuity plan

     

Annuity in NPS can be compared to a premium in a life insurance, but in reverse. In the case of NPS, you make a lump sum contribution, which is the opposite of getting a lump sum after a claim. You also receive regular income, which is the opposite of paying regular premiums. 

 

NPS annuity assures that you have a steady flow of income and that you do not out-live your savings. 

How Much Pension Will You Receive Post-Retirement?

The annuity value in NPS depends on several variables, which can be understood with an example.

 

Say you are 30 years of age and make contributions of ₹5,000 every month to your NPS fund. The expected rate of return of the NPS is 12%, and you intend to invest 40% of the NPS corpus in an annuity plan at retirement. 

 

The expected return of the annuity is 6%. In such a case your:

  • NPS investment = ₹18,00,000

  • NPS corpus (Pension wealth) = ₹1,76,49,569

  • Lump sum amount = ₹1,05,89,741

  • Monthly pension (annuity) = ₹35,299

Of course, you must remember that NPS is a market-linked product. As such, there is no guarantee that your pension wealth will climb to the projected figures. Moreover, it is best to discuss the details of your annuity plan with your annuity service provider.

Which Are the Approved Annuity Service Providers?

Annuity plans for NPS are offered by Indian life insurance companies that have been empaneled by the Pension Fund Regulatory and Development Authority (PFRDA). 

Here are the current annuity service providers:

 

  • Life Insurance Corporation of India

  • HDFC Standard Life Insurance Co. Ltd

  • ICICI Prudential Life Insurance Co. Ltd.

  • SBI Life Insurance Co. Ltd.

  • Star Union Dai-ichi Life Insurance Co. Ltd.

  • Bajaj Allianz Life Insurance Company Limited

  • Edelweiss Tokio Life Insurance Company Limited

  • India First Life Insurance Company Limited

  • Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited

  • Kotak Mahindra Life Insurance Company Limited

  • Max Life Insurance Co. ltd.

  • Tata AIA Life Insurance Company Limited

  • PNB MetLife India Insurance Co. Ltd

  • Shriram Life Insurance Company Limited

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What Types of Annuity Plans Are Available?

There are 5 main types of NPS annuity schemes for you to choose from. In each of these, the annuity product is structured differently. 

Annuity (NPS)

Details

Annuity for life

When the annuitant passes, the annuity or regular payment stops.

Annuity for life with return of purchase price on death

When the annuitant passes, the annuity service provider stops paying the annuity, but returns the purchase price to the nominee.

Annuity payable for life with 100% annuity payable to spouse on death of annuitant

When the annuitant passes, the annuity service provider continues to pay the spouse annuity for his/her lifetime. In case the spouse has passed away before the annuitant, the annuity stops at the death of the annuitant.

Annuity payable for life with 100% annuity payable to spouse on death of annuitant with return on purchase of Annuity

When the annuitant passes, the annuity service provider continues to pay the spouse annuity for his/her lifetime. When the spouse passes as well, the nominee gets the purchase price.

Default annuity scheme

This is for Government sector employees only. It offers lifetime annuity for the annuitant and spouse. It has provisions for the purchase price to be returned when the annuitant passes and for the annuity to be re-issued to family members.

One concern you may have is regarding the NPS annuity interest rate. Discuss with your provider about the possibility of an inflation-linked annuity plan so that your pension amount increases with time. Find out the current annuity rate in NPS and how it fares with inflation in India.

 

Annuity Service Providers may offer different combinations in their annuity plans, which may be in the form of:

 

  • Annuity for life at a uniform rate

  • Annuity for 5, 10, 15 or 20 years certain and then for life

  • Annuity for life with return of purchase price on death

  • Annuity for life, which increases at a simple rate of 3% every year

  • Annuity for life with 50-100% payable to spouse upon death of annuitant

  • Annuity for life with 100% payable to spouse upon death of annuitant and return of purchase price on death of spouse

Is it a Good Idea to Have an Annuity Plan?

Annuity is a good concept, and it is an integral part of NPS. What NPS does is that it gives you instant liquidity by means of a lump sum, which you can use for various goals or re-invest. It also guarantees that you have some mechanism in place to obtain regular income till death.

 

You may find annuity in NPS to be restrictive, but you should remember that NPS need not be your only retirement-oriented investment. In fact, you should consider investing in many assets. 

 

Browse through a wide list of financial tools on Bajaj Markets and chalk out a sound financial strategy for your golden years.

Is Annuity Tax Free?

When your NPS matures, up to 40% of the amount you take back as a lump sum does not attract any tax. You can use the remaining 60% to purchase an annuity plan, and this amount is exempt from tax as well. 

 

However, the annuity or regular income you receive is taxed as per your tax slab. Tax on annuity should not be a dealbreaker, as you may end up paying very little as NPS annuity tax. 

 

For instance, in the above example where your monthly pension is ₹35,299, your annual pension is ₹4,23,588. When you factor in the tax rebates available, it is possible that you will pay nil tax even with a large pension. 

 

Of course, you need to factor in other sources of income, but when your other assets increase, it is likely that your NPS fund will also decrease.

 

Having considered the different aspects of NPS annuity plans, decide whether you wish to make NPS a part of your retirement planning. Remember that NPS is a powerful government-sponsored scheme and should not be lightly omitted. 

 

However, you should also consider a healthy mix of assets to ensure that you don’t just outlive your savings but have enough to live your dreams! 

FAQs About Annuity in NPS

Can I purchase an annuity plan with more than 40% of my NPS corpus?

Yes, 40% is only the minimum limit. You can use even 100% of your accumulated pension wealth for your NPS annuity plan.

When I turn 60, can I defer purchasing an NPS annuity plan?

Yes, you can defer purchasing an NPS annuity plan for up to 3 years. 

How does my monthly contribution affect my annuity?

Large contributions during your working days lead to more accumulated pension wealth. This, in turn, leads to higher annuity (pension).

How will I receive my annuity?

Your annuity service provider will make a bank transfer to your bank account.

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