Once an employee retires with enough amount in the NPS account, he is allowed to take a substantial portion of it as lump sum. However, the remaining goes towards purchasing an annuity, which ensures a regular income for the rest of the life. To get the best returns and a stable income to provide a stable post-retirement life, it is important to choose the correct annuity plan.
For corpuses above ₹12 lakh, government employees are required to invest at least 40 percent of the corpus to buy an annuity at normal exit. While a private sector employee can withdraw 80 percent of the corpus as a lump sum or through SLW and SUR, the remaining 20 percent is bound to be used for annuity purchase.
WHAT IS AN ANNUITY PLAN?
These are investment tools or financial products for the post-retirement life of employees who seek regular salary-like income from the pension funds they generated throughout their years of service. The plans can be purchased by paying a lump-sum amount to an insurance company for immediate income or can be deferred to a future date. These plans vary in terms of the pay-out amount, return of purchase price, and other factors.
WHAT ARE THE TYPES OF ANNUITY PLANS
— Immediate Annuity: The payment in this plan begins soon after the plan is purchased. Those who need income as soon as they pay the lump-sum amount usually opt for this. When the employee goes for an annuity plan after retirement, a stable source of income may soon be required.
— Deferred Annuity: If the employee is not retired yet but plans ahead for a future source of income, he may choose a deferred annuity plan. The pay-outs begin at a future date set while purchasing the plan.
— Joint-life annuity: If an employee wants the income to continue to the spouse even after his/her demise, a joint-life annuity can be helpful. The primary annuitant would receive the income for life; however, in case of demise, the partner left behind would not have to face a financial burden. Depending on the plan, the nominee may receive the purchase price after both of them pass away.
— Annuity for life: Under this plan, the annuitant would receive an income for life; however, following the person’s demise, the payments stop. There can be two different kinds of life annuity plans: one returns the purchase price after the demise of the person; however, the pension amount is comparatively lower. The other plan offers a higher pension, while the initial premium gets locked in following the person’s demise and there would be nothing left for the heirs.
— Fixed Annuity: Retirees who want a predictable pension over the term of years or the rest of their lives may choose Fixed Annuity plans. The payout is fixed, which offers stability but has no market-related returns.
— Variable Annuity: The returns on investments in this kind of plan depend on market performance. Instead of receiving a fixed payout, the annuitant receives a pension with an underlying asset in the form of equities or bonds. It has the potential for higher returns; the pay-out may, however, be negatively affected during poor market performance.
— Annuity Certain Plan: Instead of getting a fixed income for the rest of their life, the retiree receives the pay-out for a pre-set number of years. If the annuitant passes away before the term ends, the beneficiary would receive the scheduled payments.
MAKING THE RIGHT CHOICE
The primary factor driving your choice must not be the payment amount; rather, you should carefully consider your personal financial situation and needs. Whether you have other sources of income or depend entirely on the pension amount is one major thing to look for. Following your demise, would your spouse continue to receive the payments? In case the spouse is dependent on your income, it is wiser to choose a plan accordingly instead of going for one with a higher pension but no payments once you pass away.
