National Pension System (NPS), a government-sponsored investment cum pension scheme, may soon offer options in annuity payouts when your investment in NPS matures on retirement. Pension Fund Regulatory and Development Authority (PFRDA) that regulates the NPS is planning to come up with variable annuities and systemic withdrawal option in payouts instead of existing option of the compulsory annuity plan from insurers on fixed rates.
For the uninitiated, an NPS subscriber invests some amount (minimum Rs 6,000) each financial year till the age of 60. On retirement, he can commute 60 per cent of the fund, while 40 per cent mandatorily goes into an annuity plan offered by one of life insurance companies empanelled by PFRDA for providing annuity services to NPS subscribers. There are seven annuity service providers. The insurance company gives you monthly pension on a fixed annuity rate. Typically, the pay rate doesn't change in the lifetime.
"The fixed pay rate on annuities is a deterrent. Pensioners get dejected at the time of annuity payment because during the accumulation phase, they get used to seeing around 10 per cent returns, while annuity plans have only been giving 6-6.25 per cent interest rate during the payout period. Instead of this, we are thinking about variable annuity in which payout will vary as per the benchmark interest rate in the market. We are also thinking in terms of systemic withdrawal plans, so the money will remain in the system or invested the way it did in the accumulation phase, and we'll give you monthly payout," says Supratim Bandyopadhyay, Chairman, Pension Fund Regulatory and Development Authority.
PFRDA is in the process of reviewing the payout methods and doing the groundwork.
Taking unregulated superannuation funds on fold
The newly-appointed Chairman also said that it has sought amendment in the PFRDA Act to get under its umbrella the pension schemes that are not regulated by any enactment.
"We have gone for amendment in the act so that we become the sole regulator in the pension segment. There are many unregulated superannuation funds with Income-Tax approval to offer tax benefits to employees, but there is no regulatory body to oversee if funds are properly invested and payouts are regularly extended. We are in touch with CBDT to take it forward. We have prepared a list of such superannuation funds," he says.
The amendment in the PFRDA Act will be placed in the Parliament when the Budget session resumes in March.
NPS in the new tax regime
Notably, the Budget 2020 has proposed to make employer's contribution exceeding Rs 7.5 lakh in a financial year to retirement funds such as NPS, Employees Provident Fund (EPF), or any other superannuation fund taxable in the hands of the employee under the new tax regime. Although this could be a deterrent to NPS, Bandyopadhyay says retirement benefits should not be seen only in terms of tax benefits.
"NPS is a retirement product primarily; tax benefit is icing on the cake. We don't intend to sell you NPS as a product that only gives you tax benefit," he says.
Notably, the NPS has become EEE effectively after the government in Budget 2019 increased the tax-free lump sum withdrawal limit from 40 per cent to 60 per cent. However, the monthly pension out of the mandatory annuitised 40 per cent is taxable as per your slab rate.
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