How to choose the right annuity plan in NPS?

Compulsory annuitisation: An essential requirement for novice senior citizens

To be sure, upon attaining superannuation, an NPS subscriber can withdraw up to 60 per cent of his corpus as lump sum, and the remaining 40 percent of the accumulated corpus must be used to buy an annuity.

NPS has drawn flak for forced annuitisation. But in reality, many senior citizens might not be savvy enough to handle the lump sum they get and fall prey to their banks’ relationship managers who mis-sell them ‘toxic’ products on one pretext or the other.  Besides, annuity gives them a regular income after they retire.

Also see: 70% of NPS annuity subscribers choose single life policy to pass on principal to nominee: PFRDA

Here is a look at the annuity choices for NPS subscribers.

Choose the right annuity service provider

At present, there are 15 life insurance companies — Aditya Birla Sun Life, Canara HSBC Life, Edelweiss Tokio Life, IndiaFirst Life, Kotak Mahindra Life, MAX Life, PNB Metlife India, Shriram Life, LIC, HDFC Life, Bajaj Allianz Life Insurance, ICICI Prudential Life, SBI Life, Star Union Dai-Ichi Life and TATA AIA Life — who have been appointed as annuity service providers.

“The choice of the right annuity service provider matters as you are going to be associated with them for the next 25-30 years,” says Sumit Shukla, Managing Director (MD) and Chief Executive Officer (CEO), Axis Pension Fund. It depends on the subscriber’s comfort with the brand, annuity rates and the options provided he adds.

Also see: Explained: How to make withdrawals under National Pension System

Rajesh Khandagale, Senior Vice President-NPS, KFin Technologies says, it’s imperative to look into the financial strength and stability of annuity service providers, their investment performance, technology adoption and customer support capabilities.

How to choose the right annuity option?

Before buying the annuity, you have to assess your future financial needs,  available annuity and payout options and also review the terms and conditions of the annuity contract.

Shukla recommends the longest possible annuity option to cover the lifetime of a senior citizen couple.

The annuity rates vary based on the age, purchase price, the option chosen and at the prevailing interest rate. The earlier you purchase the annuity, the less pension you will get. Shukla is in favour of the lump-sum withdrawal plan and to defer annuity purchase till 75 years.

Subscribers can choose from monthly, quarterly, half yearly or yearly payment frequencies. Usually, annuity payout is fixed at the outset and  stays unchanged.

The pension income becomes less, if a pension needs to be paid to a spouse after the passing of the subscriber. Annuity for Life without Return of Purchase Price yields the highest pension.

Annuity option, once chosen cannot be changed. So the subscriber should be careful while selecting the right option

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A subscriber needs to be cautious as the annuity option, once chosen, cannot be changed. Multiple annuity purchase options are available under the NPS. The policies can be surrendered, but terms and conditions apply.

Each annuity service provider offers between five and  15 variants of options.

Since annuity is not popular as an instrument of investment in India, the regulator has instructed the insurers to pitch five main variants — 1) Annuity for Life with Return of Purchase Price 2) Joint Life Annuity with Return of Purchase Price 3) NPS — Family Income Option with Return of Purchase Price 4) Annuity for Life without Return of Purchase Price and, 5) Joint Life Annuity without Return of Purchase Price.

1) Annuity for Life with Return of Purchase Price

What’s an offer: A subscriber gets annuity for life and on his death, the payment of annuity ceases and 100 per cent of the purchase price is given to the nominee(s).

Suitability: Those who wish to leave a lump sum for their dependents. It is the most preferred annuity option among the subscribers. About 69 per cent of the subscribers opted for this option, as per the Handbook of NPS 2024.

2) Joint Life Annuity with Return of Purchase Price

What’s an offer: A subscriber will get annuity for life time and on his death, annuity will be payable to his spouse for the rest of her life . On death of the spouse, payment of annuity ceases and 100 per cent of the purchase price will be returned to the nominee(s).

Suitability: A person who wants a regular income throughout his life and after him for his spouse and then for his nominee. This is the second most preferred option among the NPS subscribers.

Also see: How ‘bucket strategy’ can ensure regular income after retirement, while protecting nest egg

3) NPS — Family Income Option with Return of Purchase Price

What’s an offer: A subscriber will get annuity for life time and on his death, annuity will be payable to his spouse for life time. On the death of the spouse, the annuity will be paid to his dependent mother and then to the dependent father. On death of the last annuitant, payment of annuity ceases and 100 per cent of the purchase price will be returned to the surviving children of the subscriber/to legal heir as applicable.

Suitability: A person who wants a regular income throughout his life, after him for spouse, then for his parents and later for his nominee. The pension will be the lowest among these options. Only eight per cent of the NPS subscribers preferred this option.

4) Annuity for Life without Return of Purchase Price

What’s an offer: A subscriber will get annuity for life time and on his death, payment of annuity ceases and no further amount will be payable.

Suitability: Those with no dependents or liabilities or those who do not need to worry about the financial security of their spouse or heirs.

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5) Joint Life Annuity without Return of Purchase Price

What’s an offer: A subscriber will get annuity for life time and on his death, annuity will be payable to his spouse for life time. On death of his spouse, payment of annuity ceases and no further amount will be payable.

Suitability: Those with no dependents apart from the spouse or those who do not need to worry about the financial security of their heirs.

See here: Should retirees invest in tax-free bonds in secondary markets?