Most National Pension System (NPS) subscribers opt for annuity for life with return of purchase price plan. Though the family gets back the invested amount back, the annuity amount reduces significantly. Those whose children are independent should choose the annuity with no return of purchase price as the payout will be much higher.
For instance, if a private sector subscriber aged 60 years invests Rs 20 lakh for Max Life Insurance’s return of purchase price option, he will get Rs 11,876 a month. In contrast, if he opts for without return of purchase price, it will be Rs 15,238 a month.
Selecting an annuity option
Selecting the annuity option is subjective and based on the needs of the investor. The second-most popular annuity option is the joint life annuity with return of purchase price plan, where the spouse gets the benefit. Subscribers can choose from the various annuity schemes offered by 15 life insurance companies empanelled with the NPS.
As the annuity rates vary between the insurers, subscribers must compare the interest rates. In fact, the amount of annuity payment is fixed, irrespective of any change in interest rates or equity market conditions. Also, they must check the reputation of the annuity service provider and the assets under management.
Harshad Chetanwala, co-founder, MyWealthGrowth.com, says going for annuity for life with a return of purchase price reduces the annuity amount. “There are families where either the children are independent or it is just a family of two. In such a case it is better to choose annuities with no return of purchase price as the annuities payout will be higher.”
In the NPS Family Income Option with return of purchase price, the subscriber gets annuity for life and after his death, the annuity is payable to the spouse for life. On the death of the spouse, annuity is paid to the dependent mother and then to the dependent father of the subscriber. After the death of the last annuitant, the purchase price is returned to the surviving children or to the legal heir.
In a joint life annuity without return of purchase price, the subscriber gets annuity for life and after his death, the annuity is paid to the spouse for life. On death of the spouse, the purchase price will not be returned to the surviving children of the subscriber or to the legal heir.
In NPS, at the time of maturity the subscriber has to buy annuity with at least 40% of the corpus. The pension paid is added to the income and taxed as per the marginal rate.