What Is an Annuity in NPS and How Does It Work?

The National Pension System (NPS) serves as a voluntary retirement savings scheme designed to provide a steady income stream for individuals during their post-working years. Participants make regular contributions throughout their employment, aiming to build a substantial retirement corpus. An annuity, in this context, refers to a financial product that converts a portion of this accumulated savings into a regular, periodic income. This article will explain the role of annuities specifically within the NPS framework, detailing their mandatory nature, the types of products available, and the process for purchasing them.

Annuity Requirement within NPS

The National Pension System mandates the purchase of an annuity as a key part of its withdrawal process, especially at superannuation or premature exit. This ensures subscribers receive a consistent income stream in retirement. The portion of the accumulated corpus that must be annuitized varies based on the subscriber’s exit circumstances.

Upon reaching superannuation, typically around age 60, NPS regulations stipulate that a minimum of 40% of the accumulated retirement corpus must be used to purchase an annuity. The remaining 60% can be withdrawn as a tax-exempt lump sum. If the total accumulated corpus at superannuation is ₹5 lakh or less, the subscriber can withdraw the entire amount as a lump sum.

For subscribers opting for a premature exit from NPS before age 60, specific conditions apply. Generally, a minimum of 80% of the accumulated corpus must be used to purchase an annuity, with up to 20% available for lump sum withdrawal. Should the total corpus for a premature exit be ₹2.5 lakh or less, the entire amount may be withdrawn as a lump sum, bypassing the annuity requirement.

Available Annuity Products

Annuity Service Providers (ASPs) are central to the NPS framework, as subscribers must purchase their annuity plans from them. These ASPs are typically life insurance companies licensed by the Insurance Regulatory and Development Authority of India (IRDAI) and empaneled by the Pension Fund Regulatory and Development Authority (PFRDA). They manage annuity funds and deliver regular pension payments to subscribers. Numerous ASPs offer a range of annuity products, providing subscribers with choice.

Subscribers can select from various annuity options. A common choice is the “Annuity for life only,” which provides regular payments to the subscriber throughout their lifetime, ceasing upon death. Another option is “Annuity for life with return of purchase price,” where the subscriber receives lifelong payments, and upon their demise, the initial purchase amount is returned to a designated nominee or legal heir.

For individuals seeking to provide for a spouse, a “Joint life annuity” ensures payments continue to the surviving spouse after the primary annuitant’s death, typically at the same or a reduced percentage. Some plans combine features, offering a “Joint life with 100% annuity to spouse and return of purchase price,” covering the spouse and returning the purchase price after the last surviving annuitant’s death.

Other variations exist, such as the “NPS Family Income” option, which can extend coverage to dependent family members like parents, after the subscriber and spouse. Annuity payouts are influenced by the subscriber’s age, the amount invested, the annuity plan chosen, and prevailing interest rates. Subscribers can also select payment frequency, such as monthly, quarterly, half-yearly, or annually.

The Annuity Purchase Process

The annuity purchase process within the National Pension System begins when a subscriber approaches superannuation or is eligible for premature exit. The first step involves submitting a withdrawal request to the Central Recordkeeping Agency (CRA) online or by visiting a Point of Presence (POP) or nodal office. Subscribers can log into the CRA system using their Permanent Retirement Account Number (PRAN) and password to start the online withdrawal.

Upon initiating the request, the subscriber must select the withdrawal type (superannuation or premature exit) and confirm PRAN details. The system generates a withdrawal form to be filled out. Essential documentation includes the original PRAN card, valid Know Your Customer (KYC) documents like Aadhaar and PAN cards, and proof of bank details (e.g., cancelled check or bank certificate) for fund transfers.

This process involves selecting an Annuity Service Provider (ASP) and choosing the desired annuity product. The withdrawal form requires this information, directing the mandated corpus portion to the chosen ASP. Once the form is completed and documents gathered, they must be submitted to the associated POP or nodal office for verification and authorization.

After the POP or nodal office verifies documents and authorizes the request in the CRA system, funds are transferred. The lump sum, if any, is credited to the subscriber’s bank account, while the annuity portion is transferred to the selected ASP. This transfer typically occurs within a few business days. Upon receiving funds, the ASP issues the annuity policy to the subscriber. This policy confirms the annuity terms and signals the start of regular pension payments.