Understanding Annuity in NPS: Definition, Features, and Annuity Rate

In the context of the National Pension System (NPS) in India, an annuity refers to a financial product that provides a series of payments made at regular intervals. When you retire and start receiving your pension from the NPS, you typically use a portion of your accumulated corpus to purchase an annuity from a life insurance company. This annuity then pays you a fixed income for a specified period or for the rest of your life depending on the type of annuity you choose.

Types of Annuities in NPS

There are several types of annuities available in the NPS system, each with unique features:

Immediate Annuity

Payments start immediately after the purchase.

Deferred Annuity

Payments start at a future date.

Life Annuity

Payments continue for the lifetime of the annuitant.

Joint Life Annuity

Payments continue for the lifetime of the annuitant and their spouse.

Annuity Certain

Payments are made for a specific number of years regardless of whether the annuitant is alive.

Annuity Rate

The annuity rate is the percentage return or income that you will receive from the annuity purchased with your NPS corpus. It is determined by the insurance company based on several factors:

Age of the annuitant Type of annuity chosen Current interest rates Life expectancy

These rates can vary significantly among different providers and can be influenced by economic conditions. It is essential to compare rates before selecting an annuity to ensure you receive the best possible income during retirement.

Importance of Annuity in NPS

Choosing the right annuity and understanding the annuity rate is crucial for retirement planning as it directly impacts the regular income you will receive post-retirement. NPS matures when you turn 60. You can withdraw up to 60% tax-free, but with the remaining 40%, you must buy an annuity plan which gives you a lifelong pension. The amount of pension you can get and the rate of return that you receive are significant factors in assessing if the annuity is a good deal.

Details on NPS Annuity Plans

When NPS subscribers buy an annuity plan, they invest money with an insurance company. In return, the company promises to pay a pension every month. Currently, 14 insurance companies are authorized as Annuity Service Providers (ASPs). Of these, 8 are NPS pension fund managers. Overall, these 14 ASPs offer 5 types of annuity plans:

1. Annuity For Life With ROP (Recipient Oriented)

On the death of the subscriber, monthly pension stops, and the initial price at which the annuity was bought is returned to the nominee.

2. Joint Life Annuity With ROP (Recipient Oriented)

The subscriber receives a pension until death, and the spouse will also receive the pension for their lifetime. After their death, monthly payouts stop, and the annuity purchase price is paid to the nominees of the NPS subscriber.

3. Family Income With ROP (Recipient Oriented)

The subscriber receives a pension until death. The spouse will also receive the pension for their lifetime. After the spouse’s demise, the dependent mother, followed by the dependent father, of the NPS subscriber can receive the monthly NPS pension. If none of the eligible annuitants is alive, monthly payouts stop, and the entire amount is paid to the legal heirs of the NPS subscriber.

4. Annuity For Life Without ROP (Recipient Oriented)

On the death of the subscriber, payment of the annuity ceases, and the original purchase price is not returned.

5. Joint Life Annuity Without ROP (Recipient Oriented)

The subscriber receives a pension until death. After that, the pension payout continues during the lifetime of the subscriber’s spouse. After the spouse’s death, the pension payments stop, and the original purchase price is not returned.

Calculating Annuity Payments

To make things simpler, let's take an example. Say you invested in NPS and accumulated Rs. 1 crore by 60. You can withdraw Rs. 60 lakh tax-free. But you must invest at least Rs. 40 lakh to buy an annuity plan. Depending on the type of annuity plan you pick, the monthly pension may vary.

The table below shows the authorized annuity providers and the rate of returns these insurers offer for different types of annuities. If a 60-year-old buys an annuity plan worth Rs. 40 lakh, they can get a minimum of Rs. 17,870 a month at 5.36 from Star Union Dai-ichi and a maximum of Rs. 28,976 a month at 8.69 from Max Life.

Pros and Cons of Annuity in NPS

Pros:

Lacks liquidity, ensuring retirement savings are used for their intended purpose. Rate of purchase is locked for the entire lifetime of the annuity.

Cons:

You cannot withdraw the annuity under any circumstances. The rate at which you purchase the annuity is locked for the entire lifetime. The pension you earn from the annuity plan is added to your income and is taxable at your slab rate.

While choosing an annuity plan, it is important to consider factors such as the annuitant's age, the type of annuity, current interest rates, and life expectancy. Understanding these factors can help in making informed decisions regarding your retirement planning.