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

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

In NPS, a subscriber should use at least 40 per cent of the corpus to buy annuity. From the corpus of NPS, 60% can be withdrawn as a lump sum after retirement, and the remaining 40% is invested in any annuity plan of the subscriber’s choice and paid back to the subscriber as a pension . In case of premature exit before reaching the age of 60 years (or before retirement), NPS subscribers will have to invest 80 per cent of the corpus to get an annuity plan. While all amounts invested in NPS and capital gains 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.

Key Benefits of Annuity in NPS

• lifetime investment
• immediate payment of pension
• The amount of annuity payments is fixed regardless of changes in interest rates or market conditions
• no risk of reinvestment
• There is no restriction on investment

Who are the ASPs who have been appointed with PFRDA to provide annuity in NPS:

Annuity plans are provided by 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 important factors to be considered while selecting ASP

• Different ASPs have different rates at which they offer annuities
• Various ASPs require a minimum amount to be eligible for annuity purchase

What is the minimum amount to buy annuity?

The amount you invest in 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 in which one can invest.

• lifetime income Annuity to the subscriber and annuity ceases after the death of the subscriber.
• Life and Last Survivor with 100% Income – Annuity to subscriber and annuity to spouse after death of subscriber, annuity ceases after death of spouse
• Lifetime Income with Capital Refund – Annuity to the subscriber and after the death of the subscriber, the principal amount is paid to the nominee/legal heir.
• Life with 100% income with return of capital and last survivor Annuity to the subscriber and after the death of the subscriber, annuity to the spouse, the principal amount is paid to the nominee after the death of the spouse.
• NPS – Family Income Annuity to the subscriber and annuity to the spouse after the death of the subscriber. On the death of the spouse, the annuity will be re-released to the family members in the order of preference given below,

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

At the premium rate prevailing at the time of purchase of the annuity, all the members mentioned below are covered using the purchase price required for return under the contract:

How to choose the right annuity

1. A long term engagement with ASPs in the form of annuity, choose a plan and company that can provide you long term security and assurance

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

3. Which scheme you want to give priority to – It will depend on whether your family members are dependent on the pension amount you will get. As you can see from the table, the pension amount gets reduced as chosen by you, pension to your spouse on your demise, or the principal amount gets back to your nominee. If you spouse and family members are not financially dependent on you, you can opt for lifelong income plan.

4. Also note that you have to join ASP after more than 20-30 years of retirement through providing Jeevan Pramaan document. This will also include periods when your physical mobility is limited. So choose an ASP that will give you access to technology for any documentation needs.

Author: Shrikant Nadella, MD & CEO – KFintech