Understanding Pension Calculations in NPS at Retirement

Retiring in the National Pension System (NPS) can be a strategic choice for securing a steady monthly income post-retirement. The amount of pension one receives each month is determined based on the accumulated corpus in the NPS account and the chosen annuity plan at retirement. This article aims to simplify the process of pension calculations in NPS and discuss the various annuity plans available.

Pension in NPS

The monthly pension amount in the NPS is derived from the accumulated corpus in the NPS account and the annuity plan selected by the subscriber at the time of retirement. Contributions made by the subscriber to the NPS account, along with any interest earned, contribute to this corpus.

Withdrawal and Annuity Options

When NPS matures at age 60, subscribers have the option to withdraw up to 60% of the accumulated corpus tax-free. The remaining 40% must be invested in one of the authorized annuity plans offered by pension fund managers and annuity service providers (ASPs).

Examples and Calculations

To illustrate, let's consider an example. Suppose a subscriber was earning a basic pay of Rs 30,000 per month and retired in 2017. Under the old pension scheme, this individual would have received approximately Rs 15,000 per month. However, under the NPS, the pension received is around Rs 1,700 per month.

Types of Annuity Plans

There are five types of annuity plans available for NPS subscribers, authorized by 14 insurance companies known as Annuity Service Providers (ASPs). These plans include:

Annuity For Life With ROP: Monthly pension stops upon the death of the subscriber, and the initial annuity purchase price is returned to the nominee. Joint Life Annuity With ROP: The subscriber receives a pension until death, with the spouse receiving a pension for their lifetime. After the spouse’s death, the annuity purchase price is paid to the nominee. Family Income With ROP: The subscriber receives a pension until death, and the spouse also receives a pension for their lifetime. If the spouse dies, the dependent mother, followed by the dependent father, can receive the monthly pension. If no eligible annuitant is alive, the monthly payments stop, and the entire amount is paid to the legal heirs. Annuity For Life Without ROP: Monthly pension stops upon the death of the subscriber, and the original purchase price is not returned. Joint Life Annuity Without ROP: The subscriber receives a pension until death, and the pension payments continue during the lifetime of the spouse. After the spouse’s death, the pension payments stop, and the original purchase price is not returned.

Current Pension Calculations

A 60-year-old subscriber who has invested Rs 1 crore in NPS by age 60 can withdraw Rs 60 lakh tax-free. The remaining Rs 40 lakh must be invested in an annuity plan. Depending on the type of annuity plan chosen, the monthly pension will vary.

The table below shows the authorized annuity providers and the rate of returns offered for different types of annuities:

Provider Plan Type Minimum Pension (Rs) Maximum Pension (Rs) Rate of Return (%) Star Union Dai-ichi Annuity For Life With ROP 17,870 28,976 5.36 Max Life Annuity For Life With ROP 18,000 28,976 8.69

As of the current times, a 60-year-old subscribing to an annuity plan worth Rs 40 lakh can receive a minimum monthly pension of Rs 17,870 from Star Union Dai-ichi and a maximum of Rs 28,976 from Max Life, with respective rates of return of 5.36% and 8.69%.

Clarifications

It's important to note that rates fluctuate based on prevailing interest rates and the age of the applicant and investment amount. These factors can slightly vary the pension rates, but the difference is typically marginal and around 0.5-1 percentage points.

Pros and Cons

A prominent limitation of the annuity plan is that once purchased, it cannot be withdrawn under any circumstances. Additionally, the interest rate at the time of purchase is locked for life. On the positive side, the lack of liquidity can prevent retirees from making rash decisions that compromise their retirement corpus. The pension earned from the annuity plan is added to the income and is subject to tax at the applicable slab rate, which means no tax benefits are provided.

Conclusion

Understanding the pension calculation and the types of annuity plans in NPS at the time of retirement is crucial for planning a secure post-retirement life. While there are challenges, the lack of liquid options can be beneficial in managing finances effectively.

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