The Pension Fund Regulatory and Development Authority (PFRDA) has chosen six insurance firms as annuity service providers (ASPs) for the National Pension System (NPS). An annuity is a pension product that gives you a regular payout against payment of a lump sum.
Life Insurance Corp. of India, SBI Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd, Bajaj Allianz Life Insurance Co. Ltd, Star Union Dai-ichi Life Insurance Co. Ltd and Reliance Life Insurance Co. Ltd will now offer the choice of annuitizing retirement corpus upon maturity.
Even as maturity of your NPS account is far away in the future, you should know annuity products on offer.
How does NPS work?
NPS is a pure defined contribution product in which you can begin investing from the age of 18. You need to invest at least Rs 6,000 every year and the scheme has a lock-in till 60 years of age.
Upon attaining 60 years of age, you can retain 60% of the fund value and 40% goes into buying an annuity. Since NPS is meant for building a retirement corpus, it discourages early or premature withdrawals by forcing you to annuitize at least 80% of the withdrawn corpus.
In principle, the concept of annuity works like this: You give a lump sum to an ASP and in return it will provide you a periodic income at a certain rate of interest. This rate of interest is guaranteed for the life of the product. Insurers have tailored different kinds of annuity options which are available now.
Insurers are likely to offer the same annuity options to NPS subscribers as well. Says Tarun Chugh, chief distribution officer, ICICI Prudential Life, “The annuity products that we have matches the requirement of most of our customers. In fact about 90% of our customers have bought return of purchase price option or joint life with return of purchase price option. We don’t see the need to offer more products but as the market evolves, we may evaluate our products.”
But in order to cater to NPS investors who are government employees, PFRDA has also proposed an annuity option that will give a monthly pension (annuity) to the NPS subscriber and upon death of the subscriber, the monthly annuity will be paid to the family members. “At present the annuity options only allow for the spouse to continue with the annuity upon death of the subscriber. Other dependant members are given back the lump sum and they will need to buy fresh annuity. We want them to have continuation of annuity too as was the case when the employees hadn’t migrated to the NPS,” says Kamal Kr. Chaudhry, chief general manager, PFRDA.
But this may come at a huge cost. Says Chugh, “The price of an annuity is determined by the duration of our liability. If we have to offer the same annuity for the lifetime of dependants also, then the rate of interest will be very low.”
Different kinds of annuity products will offer different payouts. Says Kamalji Sahay, managing director and CEO, Star Union Dai-ichi: “Age of the investor and the type of the annuity will determine the payout. The older the person, the more will be the payout because the insurer will have to pay for a shorter time.”
What works for you will depend upon your age and your lifestyle and the number of dependants.
Also See | Basic annuity options (PDF)
PDF by Sandeep Bhatnagar/Mint