NPS to allow multiple annuity purchase for retirement income optimization

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: May 16, 2023 at 6:00 am

Last Updated on October 2, 2023 at 12:38 am

In a circular dated 10th May 2023, NPS regulator PFRDA announced that retirees can now buy multiple annuities for “Retirement Income Optimization”. However, there are still considerable limitations and much more flexibility is required.

The circular says

(1) In the interest of optimising subscribers’ retirement income and providing them with a wider range of annuity options, a choice of multiple annuities from the same ASP (Annuity Service Provider) will be made available.

Annuity options refer to one of these (for example, as provided by LIC).

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  • Option A: Immediate Annuity for life.
  • Option B: Immediate Annuity with a guaranteed period of 5 years and life thereafter.
  • Option C: Immediate Annuity with a guaranteed period of 10 years and life thereafter.
  • Option D: Immediate Annuity with a guaranteed period of 15 years and life thereafter.
  • Option E: Immediate Annuity with a guaranteed period of 20 years and life thereafter.
  • Option F: Immediate Annuity for life with return of Purchase Price.
  • Option G: Immediate Annuity for life increasing at a simple rate of 3% p.a.
  • Option H: Joint Life Immediate Annuity for life with a provision for 50% of the annuity to the Secondary Annuitant on the death of the Primary Annuitant.
  • Option I: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives.
  • Option J: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives, and the return of the Purchase Price on the death of the last survivor

(2) The option of multiple Annuities shall be provided for those subscribers who
earmark the annuity corpus of more than Rs 10 lakhs, wherein Rs 5 lakhs will be utilized to buy each annuity scheme.

This means that the minimum corpus necessary to be eligible for multiple annuity options is Rs. 10 lakhs, and the minimum corpus to be allocated for each option is Rs. 5 lakhs.

Is this feature useful?

To a limited extent, yes. A subscriber can opt for

“Option A: Immediate Annuity for life.” or

“Option I: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives.”

for one portion of the retirement corpus and choose

“Option J: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives, and the return of the Purchase Price
on the death of the last survivor” for another portion of the corpus to leave a small legacy behind to legal heirs.

Or they can buy a constant pension with one portion and an increasing pension (typically 3-4% a year) with another portion.

However, it must be understood the more beneficial an option sounds to us, the lower would be the interest rate!

It would be more useful if PFRDA allows deferred annuity purchases with the ability to choose different annuity options (and possibly different ASPs). As pointed out here – NPS Systematic Lump Sum Withdrawal Rules Explained – the annuity purchase can only be deferred by three years.

After this, the retiree must purchase an annuity (single or multiple options) for the entire sum intended (min 40% of the final corpus). It would be great if PFRDA allows a retiree to build annuity ladders.

That is, buy an annuity every five years or ten years to take advantage of higher interest rates with the increasing age of the retiree. See, for example: How to use income laddering with annuities to plan for retirement.

Also see: Use this annuity ladder calculator to plan for retirement with multiple pension streams.

Although PFRDA claims that the current change “will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income”, we do not share this enthusiasm. It is a step in the right direction, but it is of limited use without the ability to significantly stagger annuity purchases.