Retirement planning can feel like an uphill task as you need to choose between investments and savings tools considering their long-term risks and returns. The National Pension Scheme (NPS) in this regard is a very lucrative, affordable, and reliable retirement solution.
Post-retirement, NPS provides a lump-sum amount, i.e., 60% of the entire corpus and the rest in the form of fixed annuity income. Moreover, you have to compulsorily purchase the latter. As such, you may be wondering if this is a worthwhile investment.
Simply put, it is and here are answers to key questions and the reasons why annuity in NPS is a good idea.
What is Annuity in NPS?
The National Pension Scheme (NPS) is a scheme that provides post-retirement fixed-income benefits. But what is an annuity in NPS? Post-retirement, you can get a lump-sum amount from your retirement corpus. This is limited to 60% of your entire corpus.
Further, you can access the remaining 40% amount as a regular pension all through life and beyond. In your absence, your spouse will get paid the same as a regular income. This fixed-income component of your NPS corpus is called annuity.
What are the Types of Annuities in NPS?
With an answer to the question, ‘What is annuity in NPS?’, it is time for you to know the types of annuities you can get. There are many types of annuities available for NPS subscribers which differ in these features.
You can choose an annuity scheme that best suits your financial needs. The following are types of annuities based on payouts that you can choose from:
- Life Annuity: It provides a fixed income to the subscriber until their demise
- Life and Certain: It provides a pension for a period of 5, 10, 15, 20, 25 years and then till the subscriber survives
- Life and Repurchase: It pays a fixed income to the subscriber for life and then provides the purchase price to the nominee
- Inflation-linked: It pays a fixed income for life with an increase of 3% p.a.
- Life and Survivor: It provides a fixed income to the subscriber till their demise and it is paid to their spouse after that
You are free to choose the type you want, based on your goals.
What are the Features of an Annuity in NPS?
The annuity feature in NPS allows you to receive regular income even in the later years of your retirement. This helps you in maintaining your standard of living.
Apart from this, there are several of annuity in NPS that you must know.
- Annuity feature diverts a minimum of 40% of the NPS corpus’ amount towards fixed-income payments
- In case you want to surrender your NPS account before reaching 60 years of age, you will have to divert 80% of the corpus toward an annuity
- PFRDA-recognised Annuity Service Providers provide annuities
- While the earnings on the annuity scheme are taxable, you get NPS tax benefit on corpus lump-sum
Why You Should Opt for Annuity in NPS?
Understanding the nuances of the NPS instrument can be difficult. Many find it confusing, given the lack of full control over the reinvestment options for your corpus. However, the benefits of NPS annuity exceed the drawbacks and it offers immense liquidity to the subscriber as well.
Here’s a list of the top 3 benefits you can expect from an NPS annuity.
- Get a regular income post-retirement
Adjusting to a life of no income post-retirement may seem very difficult. However, with an annuity plan in hand, you can expect a regular pension at a steady rate of interest. This can help you sustain yourself and your family even in the later years of your retirement.
- Enjoy the flexibility of income
The most rewarding aspect of NPS is that it gives you the flexibility to choose from different annuity options, depending on your requirement. You can make your pick from a list of varied annuity options to ease your returns and make it more lucrative.
- Reap great NPS tax benefit
Although there is a minimum limit, there is no upper ceiling on the amount that you can invest in annuities. Note that your earnings from the annuity scheme attract taxation. Whereas, you get to enjoy NPS tax benefits on the remaining lump-sum amount as it is completely tax-free.
It is easy to gauge that in the absence of any other income, annuity income can earn negligible tax returns.
Much like a lot of other secured retirement plans that offer income at the end of the tenor, NPS too is designed to offer you a regular source of income. Evading the market risks with an NPS is easy and then you can enjoy NPS tax benefits too.
So, keeping the rewarding returns on your annuity and other aspects of NPS in mind, choose to invest in NPS as a vital component of your retirement plan.