An Annuity in the National Pension Scheme (NPS) can be understood as the receipt of a regular stream of income post-retirement with the help of NPS corpus funds. This means that at the time of your retirement, when you exit from the NPS scheme, you are required to invest 40% of the corpus funds to buy an annuity plan from the Pension Fund Regulatory & Development Authority (PFRDA). By doing this, you can ensure financial security & avoid unnecessary depletion of your corpus funds. The remaining 60% is allowed to be withdrawn without any tax liability, allowing you to meet routine expenses, unforeseen expenditures, & travel-related expenses, etc.
Let us understand it with the help of an example.
Mr A has a total corpus amount of INR 1 crore. On retirement, while exiting NPS, let us understand how it will work:
- Minimum Annuity to be Invested:
The amount equivalent to 40%, i.e. INR 40 lakhs, would be used to purchase an annuity plan from PFRDA.
- Lump Sum Withdrawal:
The remaining 60%, i.e. INR 60 lakhs, can be withdrawn without any tax burden to use it for immediate purposes.
How to Buy an Annuity Plan in NPS?
Let us now understand the steps to be followed to purchase an Annuity Plan in NPS:
Step 1: Exit NPS
Initially, you are required to close the pension plan by initiating an exit from NPS. Once this process is completed, you can start with the buying process of an annuity plan.
Step 2: Select the Type of Exit
Once the type of exit has been chosen, allocate a percentage of your corpus funds towards an annuity, which can then be converted to regular annuity income.
Step 3: Select the Insurance Company
Select a PFRDA authorised insurance company which offers an NPS annuity plan.
Step 4: Invest in an Annuity Plan
Invest at least 40% of your corpus funds towards buying an annuity plan at the rates prevailing at the time of purchase, & it would remain consistent thereafter. With this, you can get a fixed income stream that does not depend on the market situation.
Step 5: KYC Compliance
Complete your KYC compliance to process the annuity & transfer funds to start receiving the payouts.
Factors to be considered while choosing an Annuity Service Provider
Provided are the factors to be considered while choosing an Annuity Service Provider:
- Annuity Rates:
Determine the annuity rates that an Annuity Service provider is offering, as the amount of income to be received depends upon these rates only.
The higher the annuity rates, the higher the pension amount against a similar amount invested.
- Minimum Corpus:
Determine the minimum amount to be invested with the Annuity service provider that will meet their threshold limit. This will ensure that the amount of accumulated funds will be enough to buy the annuity plan in NPS.
- Provider Reliability:
Consider the reliability of the Annuity Service Provider by evaluating their track record & reputation. This is because a financially sound ASP is considered to offer long-term financial stability.
- Annuity Options:
Choose an annuity plan that best suits your financial requirements.
- Customer Support:
Evaluate the customer service of the Annuity Service Provider in terms of their quality & response to the query raised for better communication.
- Fees & Transparency:
Review all the associated fees & charges that would be applicable to the concerned plan, ensuring transparency in the charges.
- Financial Stability:
Consider the financial strength of the Annuity service provider company to ensure stability & consistency in the receipt of pension throughout the retirement period.
Features of an Annuity in NPS
Provided are the features of annuity in NPS:
- Mandatory Investment:
It requires a mandatory investment of at least 40% from your NPS corpus funds to buy an annuity plan.
- Investment Flexibility:
It allows you to invest your entire retirement corpus into an annuity plan, providing you with a potential for higher monthly income.
- Tax Implications:
The income from an annuity is taxed at the prevailing income tax rates.
- Annuity Service Providers (ASPs):
These plans can be availed from PFRDA-authorised annuity service providers with multiple plan options.
- Lump Sum Withdrawal:
The remaining 60% of the corpus funds is allowed to be withdrawn as a lump sum without any tax burden.
Benefits of an Annuity in NPS
Now that you have the basic understanding of What is Annuity, let us understand the key benefits it offers:
- Steady Income:
It entitles you to a receipt of monthly payouts, providing you with an assured income source throughout your retirement years.
- Guaranteed Security:
This plan ensures income for a lifetime, protecting you from unnecessary outliving of your corpus, especially in times of emergencies.
- Risk-Free Income:
It curtails the unnecessary stress of investing by locking the annuity rate at a fixed price, saving from market uncertainties & investment mistakes.
- Spousal Support Options:
It helps you select plans that provide financial benefits to your spouse in case of your unforeseen demise.
- Improved Financial Management:
The income source availed through this plan helps retirees to plan & manage their finances in a better manner.
- Elimination of Reinvestment Risk:
The stable rates offered ensure a steady flow of income, eliminating the fluctuating interest rates along with the pension.
- Guaranteed Income:
This plan offers a guaranteed source of income, hence providing financial stability during the retirement period.
- Market Independence:
This plan best suits risk-averse investors, where payouts are not dependent on the market performance.
- Death Benefit Coverage (Optional):
Some of the plans also offer death benefits to the beneficiaries in case of the demise of the annuitant before the receipt of the full amount.
Conclusion
An Annuity in NPS plays a vital role in retirement planning, ensuring a steady flow of income to fulfil your financial requirements throughout your retirement tenure. The pension amount to be received post-retirement depends on certain factors, i.e. the amount invested in an annuity plan, the rate of annuity, & the type of annuity plan selected. This plan ensures consistency, financial stability, & mental peace throughout the retirement tenure.
