‘Exiting’ from NPS – Part II

‘Exiting’ from NPS – Part II

In the last article, we touched upon the scenario wherein an individual receives funds from various sources upon retirement and the related dilemma regarding where to invest that looms on the individual. Let us elaborate on this topic.

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More often than not, at the time of retirement, an individual is faced with plethora of options that would enable him / her to park or deposit the excess funds that are received in bulk from various sources such as gratuity, accumulated savings, leave encashment etc. Keeping the situation in mind, one definitely may not require to withdraw the accumulated NPS corpus immediately upon attainment of superannuation (retirement), since it would only add to the existing flow of funds. This influx of funds may lead to movement to higher tax bracket of a person attracting more tax. In addition, NPS annuity i.e. the pension received from NPS will also be taxable as per existing Income Tax guidelines.?Hence, I advocate staggering of pay-outs which will help in reducing the tax liability. It is with this very angle that I recommend a retiree to make use of the deferment (postpone) option at the time of exit that is available in NPS which allows him / her to postpone annuity purchase or lump sum withdrawal or both till the age of 75.

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As was illustrated in the previous article, opting for annuity purchase with 100% of the accumulated NPS corpus is a wise move that would fetch the Subscriber a higher annuity amount that would act as a threshold income to protect against increased expenditure arising due to inflation.

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With advancing age, one’s financial needs (along with spending and savings pattern) also changes. A person at the age of 60 is comparatively more active (and could also be working and earning) than what he would be at the age of 70. In addition to that, unlike the composure that a person has at the age of 60, an individual’s cognitive skills tends to reduce with increasing age. This necessitates the need for a simple and uncomplicated product that would cater to generating a secure, regular and fixed income for the golden years (which I consider as above 70 years of age).

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The possibility of loss of a partner (spouse) is not to be overlooked upon. This is specifically important from the standpoint of a couple wherein, only one partner has been the earning member throughout life, which is prominent in Indian demography. In this case, it is vital that the non-earning partner has enough financial support in terms of steady and regular income so as to sustain for the rest of the life.

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It is this very reason due to which I recommend the deferment option of NPS. With a simple simulation as given in the image below let us see how you can increase your annuity amount simply by opting to defer the annuity purchase from 60 years to 70 years. For the simulation, we have considered annuity option as Joint Life (that covers both Subscriber and the spouse) Annuity policy with Return of Purchase Price (ROP) and without ROP option.

The simulation shows very clearly the power of compounding effect that a person can get on his / her retirement corpus by opting to defer the annuity purchase. Also, it is to be noted that the amount mentioned above is based on premise that the person would chose to utilize minimum 40% (mandatory as per PFRDA guidelines) of the total NPS corpus to purchase annuity. If one opts to increase the purchase of annuity component from 40% to 80% or even 100%, the annuity amount will also rise accordingly.?

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As I repeatedly advocate, the bigger the annuity component, i.e. opting for greater than the mandatory minimum requirement of 40%, greater the pension corpus would be which is absolutely essential in today’s changing times where we see rising cost of living. This long term financial security is the key to a happy retired life.

In the next article and last of this series, we shall dwell more on the smart ways of handling cash flow that happens when a person attains superannuation (retirement).?