The pension fund regulatory and development authority (PFRDA) the NPS regulator has released a draft proposal on implementing Systematic Lump sum Withdrawal (SLW) in the national pension scheme. The draft is open for comments/feedback until the 19th of Oct. This is an explanation of the proposed rules.
Existing rules: After the age of 60, an NPS subscriber has the following options:
Option 1: Normal exit. Here the subscriber has to buy an annuity for at least 40% of the accumulated corpus, and the rest can be withdrawn free of tax in one shot.
Options 2: Extend the time of withdrawal to age 70. The subscriber can continue to invest normally and get tax benefits as usual. This is a smart choice for those who do not need the NPS corpus immediately. An annuity purchased at age 70 will offer a higher interest rate. Also, for some people, the total taxable income at age 70 may be lower. See: What are the annuity rates of LIC Jeevan Akshay VII from Feb 2022?
Option 3: This option has different choices, but no further contributions are allowed.
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- Choice 1: Defer lump sum payout by max ten years and annuity payout by three years. After this period, the annuity must be purchased and the lump sum withdrawn.
- Choice 2: Defer only annuity (max three years) or only lump sum payout (max ten years). After this period, the annuity must be purchased and the lump sum withdrawn.
- Choice 3: Phased withdrawal of lump-sum amounts to 70 with a minimum withdrawal of 10% each year. The catch here, the annuity will have to be purchased immediately.
Note: Please consult this guide on implementing these choices: How to withdraw from NPS by optimising tax and market fluctuations after 60.
What is the problem? As per existing rules, for annual withdrawals, “the subscriber
has to initiate the withdrawal request each time, and the request has to be authorized as the case may be,” says the PFRDA draft proposal.
Proposed rule to option 3 and choice 3: PFRDA proposes that the lump sum can be paid systematically on a periodical basis viz monthly, quarterly, half-yearly or annually for a period until the age of 75 in an automated manner with a one-time request. This will apply to both Tier I and II.
Note: The annuity clause (min 40%) is still mandatory. This Systematic Lump
sum Withdrawal (SLW) is only applicable to amount not annuitized. That is the SLW will be applicable only for the lump sum portion. Subscriber can either opt for annuity immediately or defer annuity till 75 years
- No further contributions are allowed in Tier I (allowed in Tier II)
- Partial withdrawal won’t be allowed post-setting up of SLW
- Since Tier II withdrawals are not linked to age, the SLW here can be set up at any time.
- During SLW, subscribers can opt for scheme Preference or pension fund manager change. However, it will be applicable only for the lump sum portion. The annuity portion, if not already withdrawn, will remain as per the existing scheme choice only, and no changes can be made.
- The lump sum withdrawal (max 60%) is tax-free, and so is the SLW.
- Please bear in mind that the corpus is still market linked. Therfore depending on the market conditions, the corpus may deplete faster because of the continuous withdrawals. Therfore it is important to keep the assets in fixed income (C + G type bonds) and not in equity during the withdrawal stage.
Retirees who can afford to keep the lump sum in the NPS and gradually withdraw it can opt for the SLW. The proposed clause, “Partial withdrawal won’t be allowed post-setting up of SLW”, is too restrive. We have provided this feedback on the Exposure Draft – Introduction of Systematic Lump sum Withdrawal (SLW) for the benefit of NPS Subscribers. Please note that the last date for submitting feedback is Oct 19th 2022.
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