What is NPS Annuity?

In simple terms, an NPS Annuity is a financial product that provides you with a regular, guaranteed monthly pension for the rest of your life after you retire.

Here's how it works:

1. During your working years, you contribute to your National Pension System (NPS) account.
2. At retirement (age 60), your contributions grow into a large retirement corpus.
3. You must use a portion of this corpus to buy an annuity plan from a PFRDA-approved insurance company (called an Annuity Service Provider or ASP), like LIC, HDFC Life, or SBI Life.
4. This annuity plan then pays you a fixed amount of money every month (or any other frequency of your choice), much like a salary, for your entire life.

Why is it Mandatory?

The annuity component is mandatory to fulfill the primary goal of a pension system: to provide a stable and predictable income stream throughout your retirement years. So NPS mandates 40% of the NPS Retirement Corpus to be Invested in an Annuity Plan.

The key reasons for the mandatory annuity are:

• Protection Against Longevity Risk: It ensures that you do not outlive your savings. Even if you live to be 100, the pension payments will continue.
• Financial Discipline: It prevents the risk of retirees spending their entire retirement corpus too quickly, leaving them with no funds for their later years.
• Guaranteed Income: It provides a safety net of regular income, independent of market fluctuations, which is crucial for meeting essential living expenses post-retirement.

The Rule: Upon retirement at age 60, you must use at least 40% of your total NPS corpus to buy an annuity. The remaining 60% can be withdrawn as a tax-free lump sum.

What is the Best Annuity Plan for an NPS Subscriber?

There is no single "best" plan; the ideal choice depends entirely on your personal and family circumstances. Here are the most common options and who they are best for :

1. Life Annuity (Annuity for Life)

• How it works: You receive a pension for your entire lifetime. Payments stop after your death.
• Pension Amount: This option provides the highest monthly pension because the liability for the insurance company ends with your life.
• Best For: Individuals who are single or have no financial dependents.

2. Joint Life Annuity

• How it works: You receive a pension for life. After your death, your spouse continues to receive the same (or sometimes 50% of the) pension for their lifetime.
• Pension Amount: The monthly pension is lower than a Life Annuity because the insurer's liability extends over two lives.
• Best For: Married individuals who want to ensure their spouse has a regular income after they are gone.

3. Annuity with Return of Purchase Price (ROP)

• How it works: You receive a pension for life. After your death, the initial amount you used to buy the annuity (the "purchase price") is returned to your nominee (e.g., your children).
• Pension Amount: The monthly pension is significantly lower because the insurance company has to return the entire principal amount.
• Best For: Individuals who want to leave a financial legacy for their heirs while still receiving a pension.

Comparison of Annuity Options

Annuity Type	Pension for Life?	Spouse Pension?	Refund of Initial Investment?	Best For
Life Annuity	Yes	No	No	Maximum monthly income
Joint Life Annuity	Yes	Yes	No	Protecting your spouse
Annuity with ROP	Yes	No	Yes	Leaving a legacy for your children

Recommendation:

• If you have no dependents and want the highest possible pension: Choose Life Annuity.
• If your primary goal is to ensure your spouse is financially secure: Choose Joint Life Annuity.
• If leaving an inheritance for your children is important: Choose Annuity with Return of Purchase Price, but be prepared for a lower monthly pension.

Before making a decision, you should compare the annuity rates offered by different PFRDA-approved insurance companies, as they can vary.

Regards,

Honvest Team.