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How NPS' staggered lump-sum withdrawal plan can help retirees earn regular income

A new proposal by the pension regulator will allow retirees to automatically withdraw a sum of money at regular intervals. This is not the same as annuities, though.

November 02, 2022 / 11:07 AM IST

Soon, National Pension System (NPS) subscribers close to retirement might have a choice to make once they turn 60: opt for lumpsum withdrawal or make periodical, systematic withdrawals out of this corpus.

The Pension Funds Regulatory and Development Authority (PFRDA) is considering a proposal to let subscribers receive the lump sum in monthly, quarterly, half-yearly and annual installments. Think of it like a mutual fund’s systematic withdrawal plan (SWP).

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Here’s what this proposal means for NPS subscribers, should it be finalised in its current form.

What are the current rules for making withdrawals from the NPS retirement corpus?

At present, if you are an NPS subscriber, you can make a lump-sum withdrawal of up to 60 percent from your kitty at the age of vesting (that is, when she turns 60), with the balance being mandatorily converted into annuities.

You can also choose to defer receiving the entire or part lump-sum component until the age of 75. But today, if you want to make phased annual withdrawals you have to make the request every time, which then needs to be authorised. Currently, this is not automated.

Also read: EPF or NPS: Which is better for retirement planning?

How will the systematic lumpsum withdrawal (SLW) plan make things easier?

For one, subscribers will have flexibility in the frequency of payouts – you can choose to receive the amount in monthly, quarterly, half-yearly and annual installments instead of only a yearly payout option. These periodical payouts will continue till the age of 75 years, post which, the units will be redeemed and the balance paid out to you.

You will have to just send a one-time request through online or offline modes to activate this facility in Tier-I as well as Tier-II accounts. You need the specify the amount, start date, end date and so on. Once the SLW request is activated, you cannot make any further contributions to the Tier-I account. Partial withdrawals will not be allowed either.

Also read: Worried about NPS’ long lock-in? Try NPS Tier-II

Are the rules any different for SLW in Tier-II, or investment, accounts?

In the case of Tier-II, which is a voluntary investment account with few restrictions on withdrawals, you can sign up for SLW even before you turn 60. “This is mainly because of the fact that one can make withdrawals from Tier-II anytime and this facility when introduced would act like a monthly income for the subscriber or his family members,” the PFRDA note on this proposal states.

Who will benefit from the SLW facility?

According to PFRDA, the facility will provide subscribers flexibility and liquidity during their retirement years. Also, the amount that is not withdrawn will continue to remain invested in the funds you have selected and earn market-linked returns.

The existing phased annual withdrawal mechanism has not found favour with the subscribers due to the lack of flexibility in payout frequency and the need to initiate a request every time.

“Many retirees may not immediately need a huge lump-sum as soon as they retire. They may not need these funds for goals such as children’s marriage or education. So, if you do not have goals that need massive funds, then systematic lump-sum withdrawal is a better option as it can add to your regular income," says Nisreen Mamaji, Founder, Moneyworks Financial Services.

The chief purpose of a pension plan is to replace your salary during retirement years. "If you have started investing in, say, your 20s with certain goals in mind, it is possible that at 50, your requirements would be different. So, it is important to have such flexibilities (at the time of withdrawal),” she adds.

How can I sign up for SLW?

The PFRDA has proposed that at the time of exit subscribers will have to provide the percentage of corpus to be allocated towards lump-sum and annuity payout. SLW will be applicable only in the case of the lumpsum portion. You will have to log in to your NPS account, choose SLW and authenticate the request with eSign or dual factor OTP authentication.

Also read: More equity, NPS fund managers to be allowed

Can I also choose systematic withdrawal mechanism instead of purchasing annuities?

No. Systematic lumpsum withdrawal applies to the 60 percent lumpsum component. While the PFRDA chairman has discussed the possibility of giving the subscribers a choice between systematic withdrawal and annuity payouts in the past, this is yet to take any concrete shape.

“NPS is constantly seeing improvement in terms of features and flexibilities, so eventually, systematic withdrawal could be extended to the annuity portion (40 percent) too,” says Preeti Zende, Founder, ApnaDhan Financial Services.
Preeti Kulkarni is a financial journalist with over 13 years of experience. Based in Mumbai, she covers the personal finance beat for Moneycontrol. She focusses primarily on insurance, banking, taxation and financial planning
first published: Nov 2, 2022 11:07 am