Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Partial withdrawal makes NPS more flexible

Facility is for those who have invested for at least 10 years. Exit rules have also been modified

A much-awaited modification has been made to the National Pension System (NPS). Account holders will now be allowed to make partial withdrawals from it for specified emergencies. This is being allowed under Pension Fund Regulatory and Development Authority’s (PFRDA) regulations on exits and withdrawals from the NPS. Earlier rules didn’t allow this flexibility.

Here’s how the NPS works for the private sector and how you can exit the scheme or make withdrawals.

How it works

NPS is a defined contribution retirement product that needs you to keep contributing till 60 years of age. The minimum contribution to the scheme is 6,000. It currently offers three investment funds: government securities fund, fixed-income instruments other than government securities fund and equity fund. The equity exposure for the private sector is a maximum of 50% and only through the index funds that replicate either S&P BSE Sensex or the CNX Nifty index. Index funds mimic movements in the index to which they are linked. At 60 years of age, you need to annuitize at least 40% of the maturity corpus and the rest can be taken as lump sum. Annuity is a pension product that gives you periodic income or pension.

Partial withdrawal

Till now you were required to keep contributing till 60 years of age without any option of a partial withdrawal. But now, after 10 years of being in the scheme, you can withdraw up to 25% of contributions for defined expenses. These can be children’s higher education or marriage (including that of a legally adopted child), construction, purchase of first house, and treatment of critical illness for self, spouse, children or dependant parents.

The regulations have defined 13 critical illnesses and have extended this facility to accidents or other ailments of a life threatening nature. You can make up to three withdrawals during the tenor, with a gap of five years between each. This gap, however, is not applicable for critical illnesses. “Partial withdrawals give subscribers flexibility, and the limits ensure that the pension account is not wiped clean," said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.

Exiting NPS

Being a retirement product, NPS allows for an exit at the age of 60. The new regulations for the corporate NPS (when you contribute through your employer) allow you to exit at an age designated for retirement by your employer. You have the following options at this time.

You can annuitize the entire amount or a minimum of 40%. If you want to annuitize a part but keep the lump sum invested or contribute further, you can do so but only till 70 years of age after which you need to withdraw it. You can also defer the annuity payment for three years from time of exit. If you choose to defer, you will have to inform the authorities at least 15 days before it’s time for the exit, otherwise you forfeit the option. Also, you will need to pay all applicable charges that you had been paying in the scheme.

If the maturity corpus comes to 2 lakh or lesser, the subscriber can withdraw all of it and not go for an annuity.

PFRDA has allowed life insurance companies with annuity products in the domestic market for the past three years and with a minimum net worth of 250 crore to be annuity service providers. “PFRDA is taking incremental steps to make NPS easy for customers. The regulations have proposed creating a portal that will showcase the different types of annuity products, rates and annuity service providers so that the customer is able to compare and decide," added Shukla.

But the rules specify that once an annuity is purchased, cancellation and reinvestment with another annuity service provider or in another annuity scheme won’t be allowed unless this is done within the free-look period specified by the service provider. If the subscriber dies before her account matures, the entire corpus will go to the nominee or legal heirs, and if they wish they can buy an annuity product.

However, in the case of government sector, only up to 20% of the accumulated pension wealth will be paid as lump sum while at least 80% of the amount will be used to purchase the default annuity scheme designed especially for the government sector NPS.

Early exit

Leaving the scheme before maturity is discouraged by mandating that at least 80% of the corpus has to be annuitized. The earliest you can opt for an exit is after 10 years of being in the scheme. Given that annuity is a long-term pension product, the minimum eligible age to buy an annuity is typically higher, so even as the NPS allows for early exits, you will still need to wait till you are eligible to buy an annuity with 80% of that corpus. “Typically, annuities are available after 25-30 years of age whereas the entry age in the NPS is 18 years. So, even if a subscriber wants to exit, she will have to wait till she becomes eligible to annuitize her money," said Shukla. The guidelines, however, make an exception for very low-ticket accounts.

According to the guidelines, if the accumulated pension wealth of the subscriber is equal to or less than 1 lakh, the subscriber can withdraw the entire corpus without purchasing any annuity. But what the regulations don’t seem to address is what happens to a subscriber if she wishes to move from, say, the government NPS to the private sector NPS. “The regulations don’t enable portability. So, if a person quits a government job and takes up a private sector job, she will have to exit from the NPS and get 80% of her corpus annuitized as that’s the rule for an early exit and then open a fresh account in the private sector," said Manoj Nagpal, chief executive officer, Outlook Asia Capital. “Now that PFRDA is thinking about harmonizing the government and private sector NPS, it should also enable portability," he added.

Apart from specifying withdrawal and exit rules, these regulations also insulate the NPS from financial encumbrances. “No pension or accumulated pension wealth in the pension account of the subscriber under the NPS on account of past or present services, shall be liable to seizure, attachment or sequestration by process of any court at the instance of a creditor, for any demand against the subscriber, or in the satisfaction of a decree or order of any such court," said the regulations.

After the PFRDA Act got notified in February last year, the Authority is required to draft regulations around the NPS. These give more flexibility to customers to make partial withdrawals, but do keep in mind that NPS is a targeted investment product and it is better to review all your other assets before tapping NPS to meet emergencies.