Until recently, the National Pension System did not work for many, and the primary reason for this was the mandate of 40% annuitization. Under this, an investor had to commit at least 40% of her retirement nest egg accumulated through the NPS into buying an annuity at the time of retirement and at the rates prevailing then.
But that changed last year, when the mandatory annuity rule was brought down to 20% for non-government subscribers, following the introduction of a systematic lump sum withdrawal plan in 2023 that allowed customers to keep the corpus inside the NPS and withdraw in instalments over time, rather than taking it all at once.
This year, the Pension Fund Regulatory and Development Authority (PFRDA) went a step further. It introduced the Retirement Income Scheme (RIS) that allows retirees to withdraw non-annuitized corpus in a regular and systematic manner.
The RIS allows retirees to keep the non-annuitized corpus within the NPS, instead of withdrawing it as a lump sum, and draw a regular income until the age of 85.
How it works
A subscriber turning 60 or exiting after 15 years (early exit option is available only for non-government employees) can leave the lump-sum portion inside NPS, in a purpose-built fund called RIS Steady. From there, the subscriber can draw it down gradually through monthly, quarterly, or annual payouts, until the age of 85.
The mandatory annuity portion is separate and unchanged—RIS only governs the drawdown of the remaining corpus.
RIS Steady works as a glide-path fund. It starts with some equity exposure at 60 (or up to 60 years for those exiting early) and gradually reduces it as the subscriber ages—automatically, on every birthday. At age 60, the allocation is roughly 35% equity, 10% corporate bonds, and 55% government securities. By 70, equity is down to 15%. By 75, it settles at 10% equity and stays there, with government securities reaching 75% by 80 and beyond.
"The idea behind RIS is to find balance between beating inflation, while preserving the corpus," said Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors. "And the glide path aims to prevent too conservative a stance from retirees, or too aggressive ones, during their retirement years."
“The preset glide-path may not suit everyone. Very conservative investors may not be comfortable with the 35% equity exposure. At the same time, very aggressive investors may not be okay with the 65% non-equity exposure,” Dhawan pointed out.
The residual corpus, if any, goes to the nominee on death of the subscriber. If the subscriber survives, the residual corpus can go to the subscriber as lumpsum. Subscriber would also have the option to combine the residual corpus with the annuity component (if deferred) to purchase an annuity.
Two methodologies
The PFRDA has introduced two drawdown mechanisms. The default is SPR, or systematic payout rate. The alternative is SUR, or systematic unit redemption.
Under the systematic payout rate, the annual payout rate is calculated as 1 ÷ (85 minus your current age). For example, at 60, that gives a 4% withdrawal rate. At 70, it is 6.7%. By 80, it reaches 20%. The payout is calculated on the corpus value every birthday and stays fixed for the next 12 months, then resets. Payouts start modest and grow heavier in the later years, as the formula demands a larger share of whatever remains.
Systematic unit redemption works differently. On the day you opt in, your total unit balance is divided equally across all the remaining payouts. That number of units—not rupees—is redeemed every month, quarter, or year. The rupee value of each payout changes with the fund’s net asset value (NAV), but the number of units that are redeemed stays fixed throughout.
For instance, a portfolio with 8,00,000 units, drawn down over 25 years of monthly payouts, gives 2,666.67 units per month.
Simulation-based study
Samasthiti Advisors ran 10,000 simulations across good, average, and poor market scenarios to compare how the systematic payout rate and systematic unit redemption payouts behave over a 25-year drawdown period.
The study assumes if a retiree exits NPS today at age 60 and opts for the withdrawal scheme up to age 85, till the scheme allows. The study also assumed a retiree starting with a ₹1 crore corpus, with 20% going into an annuity and the remaining ₹80 lakh entering RIS, in line with the revised annuity floor for non-government subscribers. All payout figures are in inflation-adjusted terms.
Both strategies started at the same monthly payout of around ₹26,667; a 4% annual withdrawal rate on ₹80 lakh worked out to ₹3.2 lakh a year, or roughly ₹26,667 a month; systematic unit redemption arrived at the same figure by dividing the opening balance of 800,000 units equally across 300 monthly payouts, which at a starting NAV of ₹10 also gave ₹26,667.
Under the systematic payout rate, payouts dipped slightly to ₹25,385 by year 10 and ₹28,062 by year 20, but then fell sharply to ₹14,898 by year 25 as the formula forced a larger withdrawal from a depleted corpus. Under the systematic unit redemption, payouts moved more steadily: ₹25,207 at year 10, ₹26,230 at year 20, and ₹26,702 at year 25, assuming a poor market scenario. The income was slightly lower through the middle years, but suggested a more steady trajectory.
The systematic payout rate pulled ahead more in the middle years in better market conditions: in good markets, year-20 payouts were around ₹44,899 under the systematic payout rate versus ₹41,753 under systematic unit redemption. The logic, as Ravi Saraogi, co-founder of Samasthiti Advisors, notes is that the systematic payout rate is built around life expectancy-based withdrawal logic: survival probabilities are higher in early retirement, so retirees get more while they are active.
One measure the study uses to capture this is the cut-to-boost ratio: for every month that the payout rose, how many months saw a cut in payouts. The cut-to-boost ratio is arrived at by dividing the number of months of payout cuts by the number of months of payout increases. Under the systematic payout rate, this ratio was around 2.9 in good markets and 2.25 in poor markets—meaning for every income increase, there are roughly two to three cuts. Under systematic unit redemption, the ratio is 0.9 and 0.69, respectively—cuts are fewer, suggesting a steadier cash flow for retirees.
Samasthiti Advisors also ran a second study that assumes a retiree opts for the early exit option at age 50. As mentioned earlier, a non-government subscriber can exit after 15 years. The trends were similar as it showed a steadier payout for systematic unit redemption.
So, which one to go for?
For retirees who already have a pension, rental income, or other stable cash flows covering fixed expenses, that variability may not be a concern. "Systematic payout rate is likely to be more suitable for retirees with substantial other income who want higher discretionary spending during their active retirement years," said Saraogi.
“Retirees come with very different financial situations; some have rental income or a pension, others are entirely dependent on their corpus. Some have a spouse to provide for, others have pending liabilities like a child's education or a loan. There is no one-size-fits-all answer here,” explained Dhirendra Kumar, founder and chief executive officer of Value Research. "Retirees need to map their income sources, fixed obligations, and their monthly non-negotiable expenses first—and only then decide which drawdown option works for them."
Both options come with an element of market risk; the payouts under either method will vary depending on how the corpus performs.
While RIS offers a structured way to draw down the non-annuitized corpus, subscribers who already have adequate retirement income from other sources—a pension, rental income or a large annuity—may prefer to simply take the lump sum and invest it on their own terms. Outside the NPS, they have full flexibility: they can decide their own asset mix across equity, debt, gold or alternate asset classes, and draw down at a pace that suits them, without being bound by the glide path or the systematic payout rate and systematic unit redemption formulas.
There is also another option for such subscribers; that is NPS allows subscribers to defer all withdrawals up to 85 years of age and keep the corpus invested with NPS.
"By deferring withdrawals, the subscriber can continue to keep the corpus within the NPS structure. Then, closer to the age of 85, depending on one’s financial situation, health, longevity expectations, and income needs, the subscriber can decide whether to purchase an annuity, begin systematic withdrawals, or adopt another withdrawal strategy," said Dhawan.