Annuity in NPS

In the National Pension System (NPS), an annuity is a financial product that provides a regular stream of income to individuals during their retirement years. Upon reaching the age of 60, NPS subscribers can use a portion of their accumulated corpus to purchase an annuity from an insurance company. The annuity serves as a stable source of income, offering financial security in post-retirement life.

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What are Annuity Plans?

Annuity plans are financial products that provide a stream of regular payments to an individual over a specified period or for the rest of their life. These pension plans are typically offered by insurance companies or financial institutions as a way to help individuals manage their finances during retirement.

Here's how annuity plans work:

  • Purchase: An individual invests a lump sum of money, known as the premium, into an annuity plan.

  • Accumulation Phase: During the accumulation phase, the invested funds grow tax-deferred. The annuitant (the person who owns the annuity) can choose from different investment options based on their risk tolerance and financial goals.

  • Distribution Phase: At a predetermined time, usually during retirement, the annuity starts making regular payments to the annuitant. These payments can be fixed or variable, depending on the type of annuity.

What is NPS?

NPS stands for the National Pension System, which is a voluntary, long-term retirement savings scheme in India. It was launched by the Government of India in 2004 with the aim of providing financial security and promoting systematic savings for retirement. Contributions made to NPS are eligible for tax benefits under Section 80CCD of the Income Tax Act. 

What is Annuity in NPS?

Annuity in the National Pension Scheme (NPS) refers to a regular income that subscribers receive after retirement. It is a mandatory component of NPS, ensuring a steady stream of income for retirees. A minimum of 40% of your accumulated NPS corpus must be used to purchase an annuity from an Annuity Service Provider (ASP) managed by the Pension Fund Regulatory and Development Authority (PFRDA). The remaining 60% of the corpus can be withdrawn as a lump sum.

There are 15 ASPs as of now who work with PFRDA to provide annuity in NPS:

  • TATA AIA Life Insurance Company Ltd.

  • Max Life Insurance Co. Ltd.

  • Bajaj Allianz Life Insurance Company Ltd.

  • ICICI Prudential Life Insurance Co. Ltd.

  • HDFC Life Insurance Co. Ltd.

  • Canara HSBC Life Insurance Co. Ltd.

  • Aditya Birla Sun Life Insurance Company Ltd.

  • IndiaFirst Life Insurance Co. Ltd.

  • Kotak Mahindra Life Insurance Co. Ltd.

  • LIC Pension Fund Ltd.

  • Nippon Life India Asset Management Ltd.

  • PNB MetLife India Insurance Company Ltd.

  • Shriram Life Insurance Company Ltd.

  • Reliance Capital Asset Management Ltd.

  • Star Union Dai-ichi Life Insurance Co. Ltd.

What are the Features of Annuities in NPS?

Features of Annuities in NPS are:

  • The annuity amount is influenced by the purchase price, prevailing interest rates, and the chosen plan type.

  • Individuals can choose the frequency of payouts, including annually, half-yearly, monthly, or quarterly.

  • Choose between a single-life annuity or a joint-life annuity. With the joint life annuity, the spouse continues to receive annuity payments in the event of the annuitant's demise.

  • Annuity income is taxable per prevailing tax laws, but individuals can claim deductions under Section 80C for investments in the annuity plan.

What are the Benefits of Annuity in NPS?

  1. Better Money Management:

    An annuity in NPS ensures a regular and steady income post-retirement, facilitating easier financial management for individuals with consistent expenses.

  2. No Reinvestment Risk:

    The annuity rate is fixed at the beginning and guaranteed for the entire life, eliminating the reinvestment risk associated with fluctuating rates.

  3. No Cap on Investment:

    NPS annuity allows individuals to invest 100% of the annuitised corpus without any investment cap, providing the potential for higher payouts during retirement.

People also calculate: NPS Calculator

How to Purchase Annuity from NPS?

To purchase an annuity from NPS, follow these steps:

  • Before buying an annuity, exit the National Pension System (NPS), which involves closing your individual pension account.

  • Depending on the exit type, annuitise a portion of the accumulated corpus. This involves converting a part of your funds into an annuity.

  • Choose an IRDAI-licensed Life Insurance Company, that is empanelled by PFRDA to handle NPS annuity requirements. 

  • After a successful exit, invest in annuity plans with funds derived from NPS. The annuity amount depends on market-linked returns.

  • Ensure KYC compliance before issuing the annuity plan. This step is crucial for the seamless transfer of funds and guarantees a regular income for life.

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What Happens to NPS at Maturity?

At maturity, meaning upon reaching the age of 60 or under specific premature exit conditions, the fate of your NPS account depends on factors like:

You can withdraw 60% of the corpus as a tax-free lump sum under Section 10 (12A). The remaining 40% of the corpus must be used to purchase an annuity plan from any PFRDA-empaneled Annuity Service Providers (ASPs). This ensures a regular income stream during your retirement.

Why Should You Buy an Annuity Plan?

  • Annuity plans provide a guaranteed income stream, typically for your life or a set period. This can provide financial security and peace of mind, especially in retirement.

  • Unlike investments that are directly exposed to the stock market, annuity payments are not affected by market ups and downs. This can be appealing if you are risk-averse or nearing retirement.

  • In many countries, annuity plans offer tax benefits. For example, your contributions may be tax-deductible, and your annuity payments may be partially or fully tax-free.

  • Some annuity plans also offer a death benefit, which means that your beneficiaries will receive a payout if you die before you start receiving payments.

What Are the Prerequisites for NPS Exit?

Before initiating an online exit request from the National Pension System (NPS), subscribers must ensure the following prerequisites:

  • Claim ID for PRAN: Make sure the Claim ID is available for the Permanent Retirement Account Number (PRAN).

  • FATCA Compliance: Ensure that the PRAN is FATCA compliant and subscriber details, including PAN, address, contact details, bank details, and nomination details, are updated in the NPS account. If needed, subscribers can update these details online in the Central Recordkeeping Agency (CRA) or by submitting a physical request to a Point of Presence (POP).

  • OTP Authentication/eSign using Aadhaar: Submission of the withdrawal request requires OTP authentication or eSign using Aadhaar. Therefore, the subscriber's valid mobile number and email ID must be registered in CRA to receive OTP for authentication. Alternatively, for eSign using Aadhaar, the mobile number registered with Aadhaar should be valid to receive the necessary OTP for the eSign process.

What Are the Different Exit Types Under NPS?

Under the National Pension System (NPS), there are three types of exits:

  1. Superannuation Exit:

    • Occurs at the age of 60 or upon superannuation.

    • At least 40% of the accumulated corpus is converted into annuity.

    • The remaining 60% can be withdrawn as a lump sum.

    • For corpus <= 5 lacs, 100% withdrawal is an option.

  2. Premature Exit:

    • Takes place before reaching 60 or superannuation age.

    • Minimum 80% of the corpus is converted into an annuity.

    • The maximum 20% can be withdrawn as a lump sum.

    • Non-government subscribers can exit after 10 years in NPS.

    • For corpus <= 2.5 lacs, 100% withdrawal is possible.

  3. Exit Due to Death:

    For Government Subscribers:

    • Minimum 80% of the pension corpus is converted into annuity for the spouse, dependent mother, and then dependent father.

    • The balance is paid as a lump sum to the nominee/legal heir.

    • For corpus <= 5 lacs, 100% withdrawal is an option.

    • In case of no surviving family members, the corpus goes to surviving children or legal heirs.

    For Non-Government Subscribers:

    • The nominee/legal heir can choose annuities offered upon exit.

    • If opting for annuity, they select the Annuity Service Provider and scheme in the Death Withdrawal Form.

How Can You Initiate an Online Withdrawal Request?

To initiate an online withdrawal request from the National Pension System (NPS), follow these steps:

Step 1: Log in to the CRA system at www.cra-nsdl.com using your PRAN as User ID and password.

Step 2: Select the "Exit from NPS" menu option. Subscriber details like PRAN, contact, bank, and nominee information will be auto-populated (except nominee details).

Step 3: Capture specific withdrawal details, including lump sum withdrawal percentage, annuity percentage, Annuity Service Provider, and annuity scheme.

Step 4: Upload scanned copies of KYC documents, PAN, PRAN card/ePRAN, bank proof, etc.

Step 5: Submit the request using OTP authentication/eSign. Two OTPs will be sent for OTP authentication, and for eSign, the OTP will be sent to the Aadhaar-linked mobile number.

Step 6: The request must be verified and authorised in the CRA system by the associated Point of Presence (POP).

Step 7: Upon successful authorisation by the POP, the withdrawal request will be executed in the CRA system.

Who Can Join the NPS?

Any Indian citizen, whether residing in India or abroad, aged between 18 and 70 at the time of submitting the NPS application, is eligible to enroll in the National Pension System (NPS).

FAQ's

  • Can I invest more than 40% of my NPS corpus in an annuity plan?

    Certainly, individuals have the option to invest more than 40% of their NPS corpus in an annuity plan upon superannuation. Allocating a higher percentage to your annuity can result in increased income payouts, ensuring a more stable financial future.
  • How will I receive the annuity payments?

    Your Annuity Service Provider (ASP) will directly transfer the annuity amount to you through a bank transfer.
  • What impact does my monthly contribution have on my annuity?

    The monthly contributions you make to your NPS play an important role in accruing returns and building the corpus designated for your annuity. A higher monthly contribution could contribute to a larger corpus, leading to enhanced annuity payouts when you retire.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
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