Annuity in NPS

What are Annuity Plans?

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

What is NPS?

NPS stands for 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 (1) and Section 80CCD (1B) of the Income Tax Act.

What is Annuity in NPS?

Annuity in the National Pension System (NPS) refers to a regular income that you receive after the age of 60 years. It is a mandatory component of NPS, ensuring you a steady stream of income after retirement. 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 The remaining 60% of the corpus can be withdrawn tax-free in lump sum.

How to Buy Annuity in NPS?

To purchase an annuity from NPS, follow the steps mentioned below:

• Step 1- Exit NPS: Close your individual pension account in the National Pension System (NPS) before purchasing an annuity.

• Step 2- Select Exit Type: Depending on the type of exit, allocate a portion of your accumulated corpus towards annuitisation, converting it into an annuity.

• Step 3- Choose Insurer: Pick an IRDAI-licensed Life Insurance Company approved by PFRDA for NPS annuity services. 

• Step 4- Invest in Annuity Plans: Post-exit, invest the annuitised funds from NPS into annuity plans. The annuity payouts are based on market-linked returns.

• Step 5- KYC Compliance: Ensure compliance with KYC (Know Your Customer) norms before finalising the annuity plan. This step is crucial for smooth fund transfers and securing a regular income for life.

15 Empanelled ASPs 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.

Who Can Join the NPS?

The National Pension Scheme (NPS) in India is open to a fairly broad range of individuals. Let us have a look below:

• All Indian Citizens (Resident, Non-resident, Overseas Citizen of India (OCI)) between 18 and 70 years of age.

• Mandatory for Central Government employees joining on or after January 1, 2004 (except Armed Forces)

• State Government employees are covered, depending on the notification date set by their respective state. 

• Some private companies offer NPS as part of their employee benefits package.

What are the Features of Annuities in NPS?

The key features of Annuities in NPS are as follows:

• Steady Income: Receive regular payouts, typically monthly, ensuring a stable financial stream during retirement.

• Guaranteed Security: Annuities promise lifelong income, protecting against the risk of outliving savings amid uncertain investment returns.

• Risk-Free Investing: Eliminate the stress of managing investments by locking in a fixed annuity rate, shielding against market volatility and bad decisions.

• Investment Flexibility: You need to invest a minimum of 40% of your NPS corpus in annuities, with the option to go all-in for higher monthly pension.

• Spousal Support: Opt for plans that extend benefits to your spouse, ensuring their financial well-being even after you are gone.

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

What are the Benefits of Annuity in NPS?

There are several benefits to choosing an annuity option with your NPS corpus:

• Improved Financial Management: Annuity in NPS provides consistent income post-retirement, aiding in easier financial planning.

• Elimination of Reinvestment Risk: Fixed annuity rates guarantee stable income without the worry of fluctuating rates.

• Unlimited Investment Potential: NPS annuity allows full corpus investment, potentially leading to higher payouts.

• Guaranteed Income: Annuity plans offer secure, lifelong income, ensuring financial stability, especially during retirement.

• Market Independence: Annuity payments are unaffected by market fluctuations, appealing to risk-averse individuals.

• Death Benefit Coverage: Some annuity plans provide payouts to beneficiaries if the annuitant passes away before receiving payments, enhancing financial security.

Important Factors to be Considered While Selecting an ASP

Choosing the right Annuity Service Provider (ASP) is crucial to ensure a financially secure retirement through the National Pension System (NPS). Here are some important factors to consider when selecting an ASP:

• Rate of Annuity Plan: Different Annuity Service Providers (ASPs) offer different rates for annuity plans.

• Minimum Corpus Requirement: ASPs may require varying minimum amounts to purchase an annuity deposit scheme.

• Reputation and Reliability: Consider the reputation and reliability of the provider in delivering annuity payments.

• Flexibility of Annuity Options: Look for Annuity Service Providers offering flexible annuity options that suit your needs.

• Customer Service: Evaluate the quality of customer service provided by the ASP.

• Transparency and Fees: Ensure transparency regarding fees and charges associated with the annuity.

• Financial Stability: Check the financial stability of the ASP to ensure the security of your annuity payments.

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:

• Age of Retirement: Typically, NPS matures when you turn 60, but you can extend it until 70.

• Withdrawal Options: You can withdraw up to 60% of the corpus tax-free. The remaining 40% must be used to buy an annuity.

• Annuity Choice: The type of annuity plan you choose determines your pension income.

• Market Performance: The value of your NPS account depends on the market performance of your investments.

• Regulatory Guidelines: Any changes in government rules and regulations can impact your NPS account.

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-empanelled Annuity Service Providers (ASPs). This ensures a regular income stream during your retirement.

What Are the Prerequisites for NPS Exit?

You must exit from your NPS Account to purchase the annuity in NPS.

Before initiating an online exit request from the National Pension System (NPS), you 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 that your details, which include PAN, address, contact details, bank details, and nomination details, are updated in the NPS account. If needed, you 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, your 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 <= Rs. 5 lakhs, 100% withdrawal is an option.

2. Premature Exit:

   • Takes place before reaching 60 or superannuation age.

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

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

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

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

3. Exit Due to Death:

   For Government Subscribers:

   • A minimum of 80% of the pension corpus is converted into an 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 <= Rs. 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 an 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 your 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.