Having a steady income after retirement and also having enough resources is crucial for financial freedom during the golden years of one's life. To make this a possibility, investing in retirement schemes is highly crucial. NPS or national pension scheme regulated by PFRDA is one such voluntary retirement plan. This plan mandates the subscriber to stay locked in until 60 years of age.Read more
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The subscriber can choose a purchase price and the asset class in which the investment will be put. However, it is not just a simple corpus retirement plan. NPS provides both lump-sums on retirement along with regular annuity income after getting retired. 40 per cent of the corpus goes into an annuity scheme that one will have to buy compulsorily.
Ideas about annuity in NPS are quite polarizing, as many think of it as an advantage, and others think the opposite. Let's have a look at what annuity schemes are in NPS and how they can serve benefits to retirees.
An annuity in NPS is a type of investment that offers regular dividend payments for a stipulated time or life. NPS has included the annuities scheme in its plan to safeguard the financial stability of retirees. From the 100 per cent corpus of NPS, 60 per cent can be withdrawn as a lump sum after retirement. And, the rest 40 per cent, is paid as regular income after retirement to the subscriber and then to the spouse.
The annuity schemes are provided by the annuity service providers who are impanelled with PFRDA. The subscriber will have to buy an annuity scheme from the chosen ASP, and 40 per cent of the corpus will be invested in the scheme. The ASP itself will add some money to the returns, and the earnings will be distributed at regular intervals chosen by the subscriber.
There are 11 ASPs as of now who works with PFRDA to provide annuity in NPS:
When it comes to annuity in NPS, several things make it a point of discussion. Some like the annuity scheme, while others are against it. But, it is crucial to know all the facets of annuities before jumping on the 'annuities in NPS is not attractive.'
Here are some of the features of annuities that one should know of:
Many people think that it is not helpful or simply a deterrent in getting the entire corpus at retirement when it comes to an annuity. They think that instead of getting the 100 per cent lump sum at retirement, they will get 60 per cent only. And, the rest 40 per cent, will be given out as monthly income, which is not a feasible option.
However, it is seen that annuity in NPS can be a blessing for many retirees. Let’s see how the annuity scheme in the national pension scheme can help the retirees:
Many do not understand the fact that several retirees are not that savvy with handling large sums of money. They tend to be low on financial knowledge and cannot use the corpus for a regular and steady income after retirement. It leads to mishandling of such a large amount. Also, some agents will always make a retiree spend their money in places that are not profitable.
It is one of the biggest reasons why NPS has mandated the purchase of an annuity scheme using 40 per cent of corpus. It will provide a sense of stability with its steady monthly income for the rest of its life. The risk of going out of money due to bad investments is now lowered significantly.
Having a steady income after one retires can be a great thing for many retirees. It can be promised by annuity in NPS. It is because, unlike other short-term schemes, annuities have a steady rate of interest on reinvestment. It means that the reinvestment risk on annuities is eliminated.
Many retirements and other short-term investment scheme for retirees tend to have a specific investment cap. That is, one cannot invest more than that maximum limit. But, the annuity in NPS does not have such an investment cap. It means one can invest even larger sums of money in annuities for better returns.
Lastly, one most significant sore point regarding annuity in NPS is its taxability. 60 per cent corpus is not taxable, but the annuity earnings are taxable, making one stay away from NPS altogether. But, if one looks at the bigger picture, one will realize that the tax disadvantage is much smaller than the overall annuity advantage.
Usually, the post-retirement income of retirees is low, and on top of that annuity, earnings are usually not too high to fall in the tax bracket. Even if the earnings can be taxed, the tax percentage will be significantly low. It means, many retirees may not have to pay the taxes, and even if they have, the tax will not be too high. So, all in all, the taxability of the annuity earnings is not something that should be a deterrent for one to invest in NPS.