The National Pension Scheme is a retirement plan that offers a regular stream of income post-retirement. It is one of the most renowned voluntary retirement schemes backed by the Government of India. Under this plan, individuals are supposed to contribute an amount regularly to the pension account during the course of their employment. After which, at the time of retirement, a part, i.e. 60% is allowed to be withdrawn in a lump sum, & the remaining 40% can be used to purchase an annuity plan.
An annuity basically means an income from the annuity plan, which depends on certain factors, such as the NPS annuity rate & the part of corpus funds allocated towards the plan.
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The remaining 60%, i.e. INR 60 lakhs, can be withdrawn without any tax burden to use it for immediate purposes.
Factors affecting Annuity Rates in NPS
The following are the factors affecting annuity rates in NPS:
- Market Situation:
The market conditions & the applicable interest rates highly dominate the rates of Annuity Plans in India. The annuity companies may offer attractive rates when interest rates are high, because they can reap better investment returns. On the contrary, the annuity payouts may also decline during low-interest-rate periods.
- Plans Types:
There are multiple types of annuity plans available, with different rates depending on the terms & conditions. Where variable annuity plans offer rates depending on the market conditions, fixed annuities offer an assured rate of return.
- Provider Policies:
As we know, annuity rates vary widely across providers, depending on their strategies, polices & methods. Hence, it becomes important to compare the annuity rates which are offered by different insurers to ensure the best return on the investments. Also, the suitability & overall value of a plan depend on the features offered.
Who Should Opt for an NPS Annuity?
An NPS annuity plan should be opted for by the following list of individuals:
- Long-term Investors
The investors who are willing to remain invested for a longer duration until retirement, this plan best suits them. This is because they can take advantage of disciplined savings along with wealth creation benefits over a period of time.
- Risk-averse Individuals
It suits investors who are less willing to accept risks, i.e. who want guaranteed returns during retirement.
- Tax-conscious Investors
Individuals looking for tax benefits can opt for this plan, as it offers tax benefits during investment & at the time the plan is bought.
- Retirement Planners
Individuals having no pension plan or savings for their post retirement period can use this plan to build their retirement corpus.
- Government & Private Sector Employees
Though this plan is mandatory for the central government employees, private sector employees can also opt for it.
Types of Annuity Plans
Provided are the 5 main types of annuity plans:
- Annuity for life
Under this type, if an annuitant dies, the regular payment, i.e. annuity, stops.
- Annuity for life with return of purchase price on death
Under this type, if an annuitant dies, the annuity service provider will stop making payments towards the annuity, but the purchase price will be returned to the beneficiaries.
- An annuity payable for life, with 100% annuity payable to the spouse on the death of the annuitant
Under this type, if an annuitant dies, the annuity service provider will continue making payments to the spouse for their lifetime. But if the spouse dies at any time before the annuitant, the annuity will be stopped when the annuitant dies.
- An annuity payable for life, with 100% annuity payable to the spouse on the death of the annuitant, with a return on purchase of Annuity
Under this type, if an annuitant dies, the annuity service provider will continue making payments to the spouse for their lifetime. But if the spouse dies at any time before the nominee will get the purchase price.
- Default annuity scheme
This type is meant for government employees only, offering a lifetime annuity towards the annuitant & their spouses. This plan includes the return of the purchase price if the annuitant dies, & the annuity plan is to be reissued to the remaining family members.
How to Buy an Annuity Plan in NPS?
Once you have understood the meaning of what is annuity plan, 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.
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.
