Features And Benefits Of Annuity In NPS

There was a time when salaried individuals with pension benefits would await their retirement. In most cases, their pension was connected to their last collected pay, which meant that they didn't have to worry about their respective pension falling short of their expenses. They were economically secure with the defined pension they received.

However, the cost of living has risen in recent decades, disrupting even the best-laid plans for retirement. A policy change has also occurred, with defined benefit pensions giving place to defined contribution pensions. The shift has effectively removed the whole pension safety net, as the amount of pension that an individual receives is now determined by how much they save for retirement. To find out more on annuity, read on.

National Pension Scheme (NPS) Retirement Savings 

There are just a handful of financial assets that are solely focused on saving for retirement. For example, the EPF and PPF are designed to help an individual save for retirement, but they are not obligated to keep the respective individual’s money with them until the respective individual is ready to retire. Unlike the NPS (national pension system), which forces the respective individual to be locked-in until they retire, they can utilise these savings choices before they retire.

The NPS is a voluntary retirement plan that allows an individual to build a retirement fund or an old-age pension. PFRDA (Pension Fund Regulatory and Development Authority) manages it, and it's open to all Indian nationals (resident or non-resident) aged 18 to 65.

When an individual reaches the age of 60, 60 percent of their funds are transferred to their bank account, while the remaining 40% must be purchased through an annuity plan.

What Is An Annuity?

An annuity is a sort of financial investment that delivers a predictable and consistent dividend. These are long-term contracts with an insurance firm in which an individual invests their money in exchange for a monthly income. If an individual reverses the way life insurance policies are designed, they can grasp their structures. Annuities work similarly to life insurance policies in that the respective individual pays their monthly premiums and receives their regular payouts. Similarly, just as life insurance protects an individual against the chance of dying young, annuities protect an individual from the risk of living a long life.

Annuities may also be viewed as a flexible retirement plan that can be used to produce a new income stream or augment an existing one. Deferred and immediate annuities are the two main forms of annuities. An individual can generate an immediate income stream with an immediate annuity, but they can delay the annuity for a later date with a deferred annuity.  

Annuity Options Under National Pension Scheme

There are now only seven approved annuity providers (ASPs) to choose from when it comes to the NPS directed annuity scheme. When an individual’s NPS account matures, they will have to pick one annuity provider. The amount of annuity an individual receives is determined by the respective individual’s current annuity rates.

When comparing instant annuity rates, an individual should keep in mind that they are not the same as bank FD rates. For example, a 6.5 percent immediate annuity for a 60-year-old for 10 years is not the same as a 6.5 percent FD return. The FD return is a single payment, whereas the annuity payout is spread out over 10 years. So, while checking annuity rates, an individual should always go a little further.

Endnotes

In the lack of other options, an annuity might be a good option for any  individual who wants a steady and regular income in retirement. For many, the constant income flow is sufficient, and they may utilise their other savings and investments to offset growing costs and other cost-of-living considerations.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.