When you turn 60, you will get 60% of the money deposited in NPS in lump sum. You will have to buy annuity with the remaining 40% money. You will get pension every month from annuity only. There are many options of annuity, in which it is very important to choose the right option
National Pension System (NPS) is the best investment option for regular income after retirement. Investing in it will create a good fund for you till retirement. But, your pension will depend on your annuity plan. It is the responsibility of the NPS subscriber to select the right annuity plan. Since the inception of NPS on January 1, 2004, 1,65,320 subscribers have selected annuity plans till date. There are 15 different options for annuity in the market for NPS subscribers. It is important for the subscriber to choose one of these. Let us know about them in detail.
Why is it important to invest in annuity?
When the subscriber turns 60 years old, he gets 60% of the money deposited in NPS in lump sum. The remaining 40% of the money has to be used to buy annuity. Some experts say that subscribers should not be forced to buy annuity. But, subscribers getting the entire money in lump sum is not a guarantee that it will be invested in the right place. Relationship managers of banks or financial companies can sell them (subscribers) such products which may not be right for them. By buying annuity, subscribers start getting regular income, which covers their essential expenses.
How many companies offer annuity?
Currently, 15 life insurance companies offer annuities. These include Aditya Birla Sun Life, Canara HSBC Life, Edelweiss Tokio Life, IndiaFirst Life, Kotak Mahindra Life, MAX Life, PNB Metlife India, Shriram Life, LIC, HDFC Life, Bajaj Allianz Life Insurance, ICICI Prudential Life, SBI Life, Star Union Dai-Ichi Life and TATA AIA Life. A subscriber can buy annuity from any of these companies. Sumit Shukla, MD and CEO of Axis Pension Fund, said, “It is important to be cautious while buying annuity plans, because your relationship with the company from which you are buying annuity will last for the next 25-30 years.”
When is it beneficial to buy annuity?
Before buying an annuity, the subscriber needs to keep in mind his future financial needs and payout options. Apart from this, it is also important to understand the terms and conditions of the annuity contract properly. Annuity rates depend on many things. These include the age of the subscriber, purchase price, options chosen and the prevailing interest rate at that time. The sooner you buy the annuity, the lesser the pension amount you will get. Shukla believes that the subscriber should buy annuity only after turning 75 years old after taking a lump sum from NPS.
How many annuity options are there?
Once the annuity option is selected, it cannot be changed. There are 5 to 15 annuity options available. Since not many people invest in annuity in India, PFRDA has asked insurance companies to offer 5 main annuity options. These include 1) Annuity for Life with Return of Purchase Price 2) Joint Life Annuity with Return of Purchase Price 3) NPS — Family Income Option with Return of Purchase Price 4) Annuity for Life without Return of Purchase Price and 5) Joint Life Annuity without Return of Purchase Price. Let us know about them in detail.
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1) Annuity for Life with Return of Purchase Price
In this option, the subscriber gets pension as long as he is alive. The pension stops after his death. Then, the annuity money is given to his nominee. This option is good for those who want to leave a lump sum amount to their family members after their death. This is the most popular option of annuity. About 69 percent of the subscribers have selected this option.
2) Joint Life Annuity with Return of Purchase Price
In this option, the subscriber will get pension as long as he is alive. After his death, his wife/husband will get pension. After the death of the spouse, the annuity money will be given to the nominee. This option is good for those who want regular income for their wife/husband after their death.
3) NPS — Family Income Option with Return of Purchase Price
In this option, the subscriber gets pension as long as he is alive. After his death, his spouse will get the pension. After the death of the spouse, his mother (dependent) and then his father (dependent) will get the pension. After the death of the parents, the annuity money will be given to the children of the subscriber.
4) Annuity for Life without Return of Purchase Price
In this option, the subscriber gets pension as long as he is alive. After his death, the payment of pension stops. This option is good for those who do not have a spouse or children.
5) Joint Life Annuity without Return of Purchase Price
In this option, the subscriber gets pension as long as he is alive. After his death, the spouse gets the pension. After the death of the spouse, the pension payment stops. This scheme is good for those who do not have children or who do not have to worry about the financial needs of their children.
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