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Types Of Annuity Plans Valid Under NPS
You can withdraw up to 60 per cent of the contribution at retirement as you quit or shut your pension account under the National Pension System (NPS), but you must purchase an annuity policy with the outstanding 40 per cent as per the guidelines of PFRDA. Under NPS, the annuity applies to the monthly amount earned from the Annuity Service Provider by the account holder or subscriber. For the purchase of the annuity from the authorized Annuity Service Providers, a percentage of the pension capital as determined by the subscribers (minimum 40 per cent and 80 per cent in the case of superannuation and premature withdrawal, respectively), is used. After an exit from NPS Annuity Service Providers are liable for presenting that participant with a regular monthly pension of benefit. Generally, ASPs are the insurance companies controlled by the Insurance Regulatory and Development Authority (IRDA) that are mandated by PFRDA to support NPS subscribers with annuity facilities.
Exit rules under NPS
One can exit from NPS upon:
Superannuation: You will have to use at least 40 per cent of the accumulated pension fund to acquire an annuity that will offer a regular monthly pension until you hit the age of superannuation/attain 60 years of age. And as a lump-sum, you can even withdraw the outstanding corpus.
Death: The whole accumulated pension corpus (100 per cent) will be compensated to the nominee or the approved legal successor in the event of your death.
Premature exit: This means before you hit the age of 60, exiting from NPS. Considering the same it is important to use at least 80% of your accrued pension corpus for the procurement of an annuity which will include a regular monthly pension benefit. That being said, in a lump sum, the remaining 20 per cent of the funds can be withdrawn. Only after fulfillment of 10 years, one can take pre-exit under NPS.
Types of annuity plans available under NPS with ASPs
Below are the four types of annuity plans which can be purchased under NPS:
Annuity for life: Only after retirement you can get the annuity across your life. Generally, payment of the annuity ends on the death of the annuity holder. Contributions made by you in the annuity allows you to get regular payments in respect of a pension.
Annuity for life with the return of the purchase price on demise: The payment of the annuity ends upon the annuitant's death and the purchase price is handed back to the nominee.
Annuity payable for life and 100% annuity payable to the spouse on the demise of the annuitant or primary holder: During a lifespan, an annuity is paid to the spouse upon the death of the insured person. The annuity payment will terminate after the annuitant's demise in case the spouse dies before the annuitant.
Annuity payable for life and 100 per cent Annuity given to spouse on the annuitant's death and return on the annuity's acquisition: The annuity will be compensated to the spouse during the lifespan of the annuitant's demise and the purchase price will be returned to the nominee upon the spouse's death.
Our take
It is not quite straightforward or convenient to follow annuity rates. Insurers' annuity rates differ, and searching for deals before cashing in could be a smart idea. Similarly, tax status for annuities also has to be taken into consideration. For annuities, there is no tax benefit, since the annuity one earns is considered as income and charged at the slab rate of the subscriber. That being said, since at the period of maturity there is no option for NPS subscribers, they have to settle for an annuity at the time of withdrawal of 40 per cent of the corpus. In the lack of adequate options, an annuity fits for persons who are searching for a fixed and stable pension income. For several, the stable cash flow fits the aim and their other investments can be used to offset financial burden and other factors influencing their living standard. Your aim should be to gain income security over the foreseeable future rather than the increase of the principal by buying an annuity. An annuity might be the option to focus on if a guaranteed benefit is your objective in retirement.
