No annuity rider, NPS subscribers get ₹5 lakh exit option
The National Pension System (NPS) will no longer compel investors to convert 40% of their accumulated retirement corpus into an annuity, as poor yields on annuities and high inflation are translating into negative returns, the Pension Fund Regulatory and Development Authority (PFRDA) Chairman, Supratim Bandyopadhyay, said on Thursday.
The regulator will issue fresh rules to soon allow those saving up to ₹5 lakh in the NPS to take the whole amount at retirement, up from ₹2 lakh at present. The pension fund regulator is also hoping to launch the first guaranteed return NPS scheme in the coming year.
Separately, amendments will be made to the PFRDA Act of 2013 to allow NPS members with a balance over ₹5 lakh to retain 40% of the corpus in the NPS or wind it down over a few years through a system akin to a systematic withdrawal plan.
“Post-retirement, a person has to take 40% of the total corpus as an annuity as per the law’s mandate, and 60% can be commuted and taken as a lump sum. But the annuity rates always track the interest rates in the market which have come down drastically. So much so, if someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee when the person dies, the rates are varying between 5% and 5.5%,” he pointed out.
Tax, inflation hits
Since annuities are taxable, deducting the tax and factoring in inflation means annuities are yielding negative returns. “A lot of people are complaining about that. We have thought of giving them one more choice of retaining the 40% with our pension fund managers, and giving them a better return,” he said, suggesting a systematic payout scheme could be offered to them over 15 years instead of an annuity.
The Finance Ministry has announced plans to amend the PFRDA law since Budget 2019-20 and to make legislative changes to override the statutory annuitisation provision.
The need to raise the lump sum withdrawal bar from ₹2 lakh to ₹5 lakh, Mr. Bandyopadhyay said, was also driven by the paltry annuity returns.
“Suppose somebody reaches ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000 which today will fetch an income of ₹400 or ₹450 a month — a pittance,” the PFRDA chief said.
Source : The Hindu