Why You Should Consider Annuity Plans for NPS for Retirement

National Pension Scheme (NPS) is a voluntary investment-cum-retirement plan introduced by the Government of India as a social security initiative. The scheme comes under the purview of the Pension Fund Regulatory and Development Authority (PFRDA).The scheme was earlier exclusively for central government employees. However, now any Indian citizen, except the armed forces members, can voluntarily join NPS.While the benefits of NPS is well-acknowledged, the NPS subscribers can often have reservations about mandatorily investing in annuity plans. However, this rule can help them to manage their finances better in the long run.

An annuity plan can provide regular income after retirement for a specific period of life. As per the NPS withdrawal rules, subscribers can withdraw 60 per cent of their NPS retirement corpus as a lump sum amount after retirement. The rest of the 40 per cent amount will be paid as a regular pension to the subscriber and then to the spouse.

• While it is mandatory to invest a minimum of 40 per cent in annuities, there is no upper limit. An individual can invest even 100 per cent of his NPS corpus in annuities.
• An NPS account can be surrendered before reaching the age of 60 years. In such a case, the subscriber has to purchase an NPS-authorised annuity worth 80 per cent of the value of the corpus.
• The lump-sum amount received at the time of retirement is tax-free, but the earning from annuities can be taxable.

A section of NPS subscribers might argue that they should have full control over the reinvestment options for their retirement corpus. Besides, they may further argue that handing over the full NPS corpus can result in better liquidity for the buyer.However, a closer look and analysis suggests that there can be greater benefits for a retired individual if a part of his retirement corpus is locked in annuities.

• Only 40 per cent of the NPS corpus is invested in annuities which makes the remaining 60 per cent completely tax-free.
• In general, the taxable income during retirement is low for most people. Therefore, in the absence of any other income, annuity income can earn negligible tax returns.

1. Regular Income Once you stop receiving your paycheque, the perennial question is having a regular source of income. However, with an annuity plan paying you a regular pension at a steady rate of interest, you can have a steady source of income.
2. Financial Discipline Everyone cannot be a financial genius. Therefore, it is not feasible to assume that everyone is capable of making the right investment decisions with their retirement corpus.On the contrary, many retired individuals can be overwhelmed with all the investment options presented to them. Such people can often be an easy target for selling sub-standard or high-risk investment options that can be otherwise unsuitable for them.However, retirees can only get a limited pension amount every month, keeping them safe from such malpractices or inadvertent investment mistakes. Therefore, annuity plans help protect your retirement savings while inculcating financial discipline.
3. Flexibility in Investment Unlike most retirement plans that tend to have a maximum limit on investing, annuity plans for NPS have no such limit. Therefore, you can invest as much as you can in such schemes to maximise your returns.
4. Ignorable Tax Liability While income from annuities is taxable, retired individuals can practically ignore this as practically the tax payable can be much less or even nill. This is because of the following reasons.
5. For example, consider someone with an NPS corpus of Rs 50 lakhs.The mandatory annuity plan, in this case, will be worth Rs 20 lakhs.Now, even if you consider a 10 per cent rate of interest on this annuity plan, the annual income will be just Rs 2 lakh hence not attracting any tax liability.Therefore, we can see that even with an amount of Rs 50 lakhs as your NPS corpus, you can end up paying zero taxes if you do not have any other source of income.

The NPS is designed to help an individual in building a retirement corpus as well as a predictable and regular source of income. The market risks are also nicely managed through automatic modification in capital allocation as one approaches the retirement age.Therefore, you should consider investing in NPS as a vital part of your retirement plan.

1. Who decides the fund manager? The NPS subscribers can choose their fund manager.
2. Are there any investment choices for NPS subscribers? NPS subscribers can choose from two types of investment choices.
3. Active Investment The subscriber can choose the portion of fund allocation to different asset classes.
4. Automatic Investment The funds are automatically allocated to different asset classes as per the investor's age in a pre-defined manner.For example, the investor might have higher exposure to equities at a young age, but as he ages, his equity exposure will be automatically reduced to make the profile risk-averse gradually.
5. What are the different asset classes available in NPS? An NPS subscriber can into four different asset classes mentioned below-

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.