Post-retirement, subscribers of National Pension System (NPS) should opt for a hybrid approach — annuities to cover essential expenses and systematic lumpsum withdrawal plans (SLWP) for discretionary needs. This balances income security with long-term growth and inflation protection.
As most standard annuities do not adjust for inflation, subscribers can benefit from limiting annuity allocation to the 20% minimum—thereby securing a baseline income—while staying invested with the remaining corpus across NPS schemes designed to generate a growing income over time.
Allocation for annuity
Subscribers should first identify the monthly gap between essential living expenses and assured income sources such as rental income or existing pensions. This gap should be covered through annuity, as it provides stability and protects against longevity risk. This is effectively a flooring strategy.
“If the 20% minimum annuity does not adequately cover this gap, it may be prudent to allocate a higher portion toward annuity to ensure a stable, lifelong income stream,” says Kurian Jose, chief executive officer, Tata Pension Fund Management.
As annuity rates vary according to the plan and insurer, subscribers should compare payout rates across insurers and evaluate the type of annuity — life-only, joint life, or with return of purchase price, as this impacts both income and legacy.
Rahul Bhagat, CEO, DSP Pension Fund, says subscribers should also factor in inflation risk, as most annuities offer fixed income that loses purchasing power over time. “Annuities offer limited liquidity and flexibility, so the decision should be viewed as a long-term commitment rather than a short-term product choice,” he says.
SLWPs outdo annuity
Over extended periods, SLWPs outperform annuities because they can benefit from equity exposure and more favourable tax treatment. They are more efficient for investors who can tolerate some level of risk.
Subscribers must keep in mind that annuities are irrevocable. Once purchased, they cannot switch providers or significantly alter the terms of the contract. This makes the initial decision critical. Also, annuities are taxed at the individual’s applicable income slab.