India's National Pension System (NPS) has introduced another post-retirement option for subscribers—the Retirement Income Scheme (RIS), designed to provide a steady income stream after retirement.
Subscribers now have three choices for generating post-retirement cash flows: the newly launched RIS, annuity, and Systematic Liquidity Withdrawal (SLW).
Each serves a different retirement need, making it important to understand how they compare before deciding.
New option
RIS is a structured post-retirement withdrawal framework that aims to provide regular income while helping preserve the longevity of the retirement corpus.
At maturity, subscribers can withdraw up to 80% of the corpus as a lump sum or opt for RIS. Under RIS, the retirement corpus remains invested while subscribers receive periodic payouts. An age-based glide path gradually reduces portfolio risk over time.
Payouts begin after the accumulation phase and continue until the subscriber turns 85.
Under the RIS Steady option, equity exposure gradually declines from 35% at age 60 to 10% after age 75, while the allocation to government securities rises from 55% at age 60 to 75% after age 80, aligning the portfolio with the retiree's changing risk profile.
RIS offers two drawdown options—Systematic Unit Redemption (SUR) and Systematic Payout Rate (SPR), with SPR being the default.
Under SUR, a fixed number of units is redeemed at each withdrawal. Under SPR, payouts are based on age-linked withdrawal rates prescribed by PFRDA, beginning at 4% at age 60 and gradually increasing to 100% at age 84.
Investors evaluating between RIS, SLW, and annuity should assess the following:
Management style
Investors should first consider how actively they want to manage their retirement corpus.
RIS and annuities require relatively little ongoing intervention because payouts and portfolio allocation follow predefined rules.
With annuities, the biggest advantage is that the pension payout rate is locked in for life.
SLW, on the other hand, is merely a withdrawal facility. Retirees decide both the withdrawal amount and frequency. However, responsibility for managing investment risk and ensuring the corpus lasts throughout retirement rests entirely with the retiree.
Income adequacy
RIS begins with a payout rate of 4%, while annuities currently offer around 6-6.5% annually.
Would these payouts adequately cover regular expenses? Or would an SLW strategy—combined with a bucket approach that allocates funds across different time horizons—offer greater flexibility in meeting spending needs?
Market risk
The prescribed payout rates represent maximum permissible withdrawals and should not be interpreted as fixed income. Actual payouts depend on market performance and the value of the retirement corpus.
This exposes retirees to sequence of returns risk—the possibility that poor market returns during the early years of retirement, when withdrawals begin, could deplete the corpus much faster even if long-term average returns remain unchanged.
When markets decline early in retirement, more investment units must be sold to generate the same income, leaving less capital available to participate in any subsequent market recovery.
For this reason, retirees cannot simply assume that equities will consistently generate 12% annual returns and conclude that withdrawing 5-6% each year is sustainable.
Those considering RIS should ensure they have both the risk appetite and the financial flexibility to withstand periods of weak market performance, particularly during the initial years of retirement.
Corpus longevity
Under RIS, the retirement corpus is expected to be fully exhausted by age 84, after which retirees will need to rely on other income sources.
By contrast, annuities offer the option of receiving pension payments for life, with the corpus returned to the nominee upon the subscriber's death.
Tax impact
The taxation of withdrawals under RIS and SLW has not yet been clearly specified, whereas annuity income is taxed according to the individual's income-tax slab.
Until greater clarity emerges, investors may need to assume that withdrawals are fully taxable. This also raises the question of whether it is preferable to opt for periodic withdrawals or instead take a lump-sum withdrawal, where up to 60% of the retirement corpus is tax-free.
Which option?
Annuities remain well suited for conservative investors seeking guaranteed lifetime income without market fluctuations.
With current annuity rates at around 6-6.5% annually and fixed for life, such investors may even choose to allocate more than the mandatory 20% or 40% of their NPS corpus to annuities.
RIS offers retirees greater flexibility and potentially higher long-term growth while providing relatively predictable income. It also relieves retirees of the need to actively manage the invested portion of their retirement corpus.
Individuals who are not entirely dependent on RIS for meeting regular expenses and who value ease of managing post-retirement proceeds may find it an attractive option.
For investors who prefer maximum flexibility in managing their retirement corpus alongside other income sources, SLW remains a suitable alternative.
Mrin Aggarwal is financial educator and CEO, Finsafe India.