The pension fund regulator’s proposal to reduce the mandatory annuitisation level from 40% of the accumulated corpus to 20% will enable subscribers to efficiently utilise their retirement savings as annuity yields modest returns.
However, there is a rider. While 60% of the corpus withdrawn as lumpsum will continue to be tax-free, the additional 20% if withdrawn as lumpsum will be taxed at the marginal rate.
Compulsory annuity
Currently, subscribers in the National Pension System (NPS) need to mandatorily buy an annuity with at least 40% of their corpus at exit from the age of 60 to 75 years. Experts say this limits liquidity and ties them to an annuity product which may potentially give modest returns.
This proposed flexibility will make NPS more attractive to individuals who are hesitant about locking too much money in annuities. Subscribers can withdraw up to 80% of the retirement corpus as a lump sum or systematically in a periodic manner and use the money to meet personal goals, or reinvest in other market-linked instruments.
Rahul Bhagat, chief executive officer, DSP Pension Fund, says allowing individuals to retain a larger share of their corpus gives them the freedom to design retirement income strategies based on their personal needs, whether through systematic withdrawals, reinvestments, or alternative income products. “This aligns well with customer demand for greater liquidity at the time of retirement and empowers subscribers to make choices that best suit their financial requirements,” he says.
Early exit
The Pension Fund Regulatory and Development Authority (PFRDA) has also proposed that subscribers be allowed to exit the NPS after 15 years, even before reaching 60 years of age. It addresses one of the main concerns of younger participants.
By allowing early exit, the scheme becomes more attractive, especially for younger employees, as it balances the need for disciplined retirement savings with the assurance of access to funds in case of changing life priorities. Kurian Jose, chief executive officer, Tata Pension Fund Management, says this feature increases liquidity and flexibility of investment into NPS, assuring younger investors that funds are not permanently locked and can be accessed for life goals such as education, home purchase and emergencies. “This could help drive participation among millennials and Gen Z professionals who value financial flexibility,” he says.
Upon completion of 15 years, the subscriber has the option to exit the NPS architecture by purchasing an annuity with minimum 20% of the corpus and utilising the remaining as a lumpsum or systematic periodic withdrawal or continue in the NPS architecture by switching to the common schemes of the NPS.
Annuity options
As the annuity rates are low, subscribers should opt for systematic lump sum withdrawal for the lumpsum amount. The staggered withdrawal process will help them to earn higher returns as corpus will continue to remain market-linked. It will be applicable only for the lump sum portion and subscribers can either opt for annuity immediately or defer annuity till 75 years.