Annuity in NPS: How to choose the right annuity for a regular income?

Annuity means a fixed sum of money paid to a subscriber at a set frequency for the rest of their life.

An annuity provides a regular income (it could be monthly, quarterly, annual, etc) at a specified rate for a specified period chosen by the subscriber. It means the person can pay the money to an Annuity Service Provider (ASP) and choose an annuity option to ensure a regular income after retirement.

In NPS, a subscriber must use at least 40 per cent of the corpus to buy an annuity. From the corpus of NPS, 60% can be withdrawn as a lump sum after retirement, and the rest 40%, is invested in any annuity scheme of the subscribers choice and is paid back by way of pension to the subscriber. In case of premature exit before reaching the age of 60 (or before retirement) , NPS subscribers will have to invest 80 per cent of the corpus to get the annuity scheme. Although all amount invested and the capital gains from the investments in NPS are tax-free on withdrawal, the amount paid as pension will be added to your income and taxed as per the income tax slab applicable to you.

 

Core Benefits of Annuity in NPS

• Onetime Investment
• Immediate payment of pension
• The amount of annuity payment is fixed, irrespective of the change in interest rates or market conditions
• No Risk of reinvestment
• There is no cap on Investment

Who are the ASPs which are emplaned with PFRDA to provide annuity in NPS:

The annuity schemes are provided by the annuity service providers who are empaneled with PFRDA.

• Aditya Birla SunLife Insurance Company Limited
• Bajaj Allianz Life Insurance Company Limited
• Canara HSBC Life Insurance Company Limited
• Edelweiss Tokio Life Insurance Company Limited
• HDFC Life Insurance Company Limited
• ICICI Prudential Life Insurance Company Limited
• IndiaFirst Life Insurance Company Limited
• Kotak Mahindra Life Insurance Company Limited
• Life Insurance Corporation of India
• Max Life Insurance Company Limited
• PNB Metlife India Insurance Company Limited
• SBI Life Insurance Company Limited
• Star Union Dai-ichi Life Insurance Company Limited
• Tata AIA Life Insurance Company Limited

Some of the important factors to be considered while selecting an ASP

• Different ASPs have different rate at which they provide Annuities
• Different ASPs require a minimum amount of corpus to be eligible for annuity purchase

What is the minimum amount to buy an annuity?

The amount you invest into an annuity depends on the type of annuity you want and the goals you want to achieve

Types of Annuity Plan

There are five types of annuity plans that one can invest in.

• Lifetime Income - Annuity to subscriber and after the demise of the subscriber, annuity ceases.
• Life & Last Survivor with 100% Income - Annuity to subscriber and after the demise of the subscriber, annuity to spouse, after demise of spouse, annuity ceases
• Lifetime Income with Capital Refund - Annuity to subscriber and after the demise of the subscriber, principal amount is paid to nominee/legal heir.
• Life & Last Survivor with 100% Income with Capital Refund - Annuity to subscriber and after the demise of the subscriber, annuity to spouse, after demise of spouse, principal amount is paid to the nominee.
• NPS - Family Income - Annuity to subscriber and after the demise of the subscriber, annuity to spouse. On demise of spouse, annuity to be re-issued to the family members in the order of preference provided below,

1. living dependent mother of the deceased subscriber
2. living dependent father of the deceased subscriber
3. After the coverage of all such members, the purchase price shall be returned to the surviving children / legal heirs of the subscriber

At a premium rate prevalent at the time of purchase of the annuity, utilizing the purchase price required to be returned under the contract until all the members given below are covered:

How to choose the right Annuity

1. As annuity a long-term engagement with the ASP, choose a plan and company that can provide you long term safety and assurance

2. How much of the corpus to invest in Annuity – on retirement, you can invest anywhere between 40% and 100% of your corpus in annuity. You will have to balance your need for immediate cash flow on retirement with your need for a higher pension. The higher the amount you invest in Annuity, the higher pension you will get.

3. Which scheme you want to prefer – this will depend on the dependency your family members have on the pension amount you get. As you can see from the table, the pension amount reduces as you choose, pension for your spouse on your demise, or principal amount back to your nominee. If you spouse and family members are not financially dependent on your you can choose the lifetime income scheme.

4. Also keep in mind that you will have to engage with the ASP more than 20-30 years after retirement, by way of providing them with proof-of-life documentation. This will also include period when your physical mobility will be limited. So choose an ASP that will provide you access to technology for any documentation needs. 

Author: Sreekanth Nadella, MD and CEO – KFintech