National Pension System: Choosing right annuity schemes

Subscribers of National Pension System (NPS) will now get a wider range of annuity options and can opt for multiple annuities from the same annuity service provider to optimise their retirement income. The Pension Fund Regulatory and Development Authority (PFRDA) in a circular has said that the option of multiple annuities will be allowed to those subscribers who earmark the annuity corpus of over Rs 10 lakh, wherein Rs 5 lakh will have to be utilised to buy each annuity scheme.

At present, subscribers are allowed to buy one annuity scheme from the annuity service provider at the time of exit. There are 15 annuity service providers empanelled by PFRDA to maintain the annuity contribution of subscribers. The annuity service providers are life insurance companies regulated by the insurance regulator and empanelled by the PFRDA to provide the annuity to the NPS subscribers.

The pension amount will vary based on the types of annuity plans such as pension for life with return of purchase price on death of the annuitant, pension for life at a uniform rate, pension payable for 5, 10, 15 or 20 years, pension payable for life increasing at a rate of 3% a year, pension for life with a provision of 50% of the annuity payable to spouse for upon death of the annuitant, pension for life with a provision of 100% of the annuity payable to spouse upon death of the annuitant, etc.

Opting for NPS annuity

One of the major benefits of NPS for private sector employees is that there is no upper cap on the amount of investment. Regular investments and step-up contributions periodically will result in a larger annuity corpus, which can be used for generating a higher pension. Other popular annuity schemes have upper limit of investments such as Pradhan Mantri Vaya Vandana Yojana at `15 lakh, Senior Citizen Savings Scheme at `30 lakh.

In NPS, a subscriber can withdraw 60% of corpus after maturity and the remaining 40% will have to be mandatorily invested for purchasing annuity. The 60% of the corpus withdrawn will be exempt from tax and the 40% of the amount is invested for annuity. However, the regular annuity income received will be taxed at the marginal rate of the taxpayer. In case the accumulated corpus is below `5 lakh at the time of maturity, then the subscriber can withdraw the entire corpus. In such a case, the IT- exemption will not extend beyond 60% of the corpus and the remaining 40% of the corpus would be taxable upon withdrawal.

In case a subscriber plans to surrender the scheme before reaching the age of 60, then he will have to allocate 80% of the corpus to get the annuity scheme. Once the annuity service provider is selected, a subscriber cannot change the annuity scheme or even the service provider.

Steady income

The annuity amount provides a steady monthly income for life. The payout can be monthly, quarterly or annual as chosen. So, it is important to select the right annuity scheme and a stable annuity provider at the time of the exit from NPS as annuity will be a long-term engagement with the service provider. To accumulate a retirement corpus at a low cost, a subscriber can either opt for active choice or auto choice. Private sector NPS subscribers may invest up to 75% of their funds in equity and the low cost structure of NPS will make a difference to the returns and the final corpus.