Retirement planning does not end when you build a sizeable NPS corpus. At the time of exit, one of the most important decisions is what to do with the portion of the corpus that has to be used to buy an annuity.
The choice can have a direct impact on how much pension you receive every month, whether your spouse continues to get that income after your death, and whether the money used to buy the annuity eventually comes back to your family.
Under the NPS, an annuity is bought from an Annuity Service Provider (ASP), which then pays the subscriber a regular pension. At normal exit, at least 40% of the accumulated pension wealth is generally used to buy an annuity, while the remaining amount can be taken as a lump sum, subject to the applicable NPS rules. Subscribers whose total corpus at exit falls below the threshold set by PFRDA can withdraw the entire amount as a lump sum, without buying an annuity.
This is where the choice of annuity becomes important. A plan that gives you a higher pension during your lifetime may offer less protection to your spouse or nominees. Options that continue the pension to your spouse or return the purchase price to the family can provide greater protection, but the initial pension may be lower.
As Rajesh Khandagale, SVP – NPS, KFintech, explains, the decision should not be based only on the highest monthly payout.
“The choice should be guided by three priorities: the retiree’s income needs, financial security for the spouse, and the importance of returning the purchase price to the family. The decision is to made considering the extent of financial dependence the family members (spouse, parents, children) have on the retirees’ income.”
5 NPS annuity options you should know
There are several annuity variants available through NPS. Five commonly available options stand out because they address different retirement and family needs. However, not every ASP offers every variant, and the pension amount and pricing can vary between providers.
| NPS annuity option | What happens after your death? | Return of purchase price? | Who may consider it? |
| Annuity for Life | Pension stops after the subscriber’s death | No | Those who want to maximise their own regular income |
| Annuity for Life with Return of Purchase Price (ROP) | Pension stops after death | Yes, purchase price goes to nominee/legal heir | Those who want to leave the purchase amount to family |
| Annuity for Life with 100% to Spouse | Spouse continues to receive 100% of the annuity for life | No | Those whose spouse depends on their pension |
| Annuity for Life with 100% to Spouse + ROP | Spouse receives 100% pension for life; after both deaths, purchase price is returned | Yes | Those wanting both spouse protection and a family legacy |
| Family Income with ROP | Pension continues to spouse and subsequently eligible dependent parents | Yes | Those supporting a spouse and dependent elderly parents |
1. Annuity for Life: Higher personal income, but no family payout
This is the most straightforward option. You receive the annuity for your lifetime. Once you die, the pension stops and there is no return of the purchase price.
The attraction is simple: the option is focused on providing income to the retiree during his or her lifetime. It may therefore suit someone who does not have financially dependent family members or who gives greater importance to maximising their own regular pension.
Khandagale says, “Annuity for Life is focused solely on the subscriber’s own lifetime income and may suit those primarily seeking higher personal income.”
The important catch is that the purchase price does not come back to the nominee after death. So this option should not be viewed only through the lens of monthly pension. The subscriber also needs to consider what happens to the annuity corpus after death.
2. Annuity for Life with Return of Purchase Price: Pension plus legacy
Under the Return of Purchase Price (ROP) option, the subscriber receives pension for life. After the subscriber’s death, the annuity payments stop, but the purchase price is returned to the nominee or legal heir.
This can appeal to retirees who want a regular pension but also want the amount used to purchase the annuity to eventually reach their family.
The trade-off is that an ROP option can come with a lower initial pension than a comparable annuity without the return-of-purchase-price feature.
Khandagale says this option “may suit those prioritising family legacy.”
3. Annuity for Life with 100% to Spouse: Protecting the surviving spouse
For many retirees, the bigger concern is not what happens to the corpus after their death, but whether their spouse will have enough income to live on.
Under this option, the subscriber receives the pension during their lifetime. After their death, the spouse receives 100% of the annuity for life. Once both have died, the annuity payments stop. There is no return of the purchase price under the basic version of this option.
This makes the option particularly relevant for households where one spouse is financially dependent on the other.
“If the spouse is financially dependent, ensuring continuity of income may be more important than maximising the retiree’s own monthly pension,” Khandagale says.
That is an important point for retirees comparing annuity quotes. The highest monthly pension may not necessarily be the most suitable option if it leaves a financially dependent spouse without an income later.
4. Annuity for Life with 100% to Spouse + ROP: Income security and family protection
This option combines the two protections that many retirees may want: continued income for the spouse and return of the purchase price.
The subscriber receives the annuity during their lifetime. After the subscriber’s death, the spouse continues to receive 100% of the annuity for life. After both have died, the purchase price is returned to the nominee, as provided under the annuity contract.
It therefore provides a wider safety net, but retirees should remember the basic trade-off: adding more protection can affect the initial pension payout.
Khandagale describes it as an option that “combines continued spousal income with return of the purchase price after both pass away.”
For a couple that wants to protect the surviving spouse without giving up the possibility of passing the purchase amount to the family, this can be worth considering.
5. Family Income with ROP: When parents also depend on you
This is the most family-oriented option among the five.
Under the NPS Family Income option, the income can continue beyond the subscriber and spouse to eligible dependent parents. The structure provides for the spouse first and subsequently the dependent mother and father, with the purchase price ultimately returned to the nominee or legal heir after the last surviving family member.
This can be particularly relevant for retirees who continue to support elderly parents in addition to their spouse.
“Family Income with ROP extends income first to the spouse, and subsequently to the subscriber’s dependent mother and then father, with the purchase price ultimately returned to the nominee/legal heir after the last surviving family member,” Khandagale says.
In other words, this option is designed around the family’s income needs rather than just the subscriber’s retirement income.
Matching the option to your priority
If your priority is the highest possible personal pension, an Annuity for Life may be worth considering. If your priority is leaving the purchase amount to your family, an ROP option may make more sense. If your spouse is financially dependent on you, 100% spouse pension can provide greater income security. If you want both spouse protection and return of the purchase price, the 100% spouse + ROP option offers both features. And if you are supporting a spouse as well as dependent elderly parents, the Family Income with ROP option may be more relevant.
“There is generally a trade-off between these benefits. Options that provide continued income to the spouse or return of the purchase price may offer greater family protection but can have a lower initial pension than options without these features,” Khandagale says.
Don’t compare annuity options only on pension amount
The pension offered by an annuity is not determined by the option alone. It can also depend on factors such as the subscriber’s age, the amount used to purchase the annuity, the selected annuity option and the Annuity Service Provider.
PFRDA also notes that not all ASPs offer every annuity variant and that available options and pricing can differ between providers. This means retirees should compare the actual quotes available to them rather than assuming that one option will always provide a particular pension.
Most importantly, an annuity is a long-term decision. Once you use the NPS corpus to purchase an annuity, the money is being converted into a stream of pension payments according to the chosen contract.
So before choosing, ask three simple questions: How much monthly income do I need? Will my spouse need this pension after I am gone? And do I want the purchase price to eventually go back to my family?
As Khandagale puts it: “Ultimately, retirees should assess their family’s financial needs and choose an option that balances present income with long-term security.”
That is perhaps the most useful way to look at NPS annuity choices: not as a choice between five pension products, but as a choice about how your retirement income and family finances should work after you retire.
Disclaimer: Annuity options, payouts and terms may vary across Annuity Service Providers and depend on factors such as the subscriber’s age, annuity purchase amount and option selected. Readers should check the applicable NPS rules and the terms offered by the respective Annuity Service Provider before making a decision.
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