In Oct 2022, the Pension Fund Regulatory and Development Authority (PFRDA), the NPS regulator, released a draft proposal on implementing Systematic Lump sum Withdrawal (SLW) in the national pension scheme and sought public feedback. We had earlier discussed the withdrawal rules, the proposed change and our feedback on the same: NPS Systematic Lump Sum Withdrawal Rules Explained.
The Hindu BusinessLine recently quoted the PFRDA chairman that systematic withdrawal will be available from this calendar year. A discussion on what is proposed, what retirees should be aware of and how (when) they can benefit.
What are the existing NPS withdrawal rules, and where does this proposal fit?
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 Here the subscriber has to buy an annuity for at least 40% of the accumulated corpus, and the rest can be withdrawn free of tax in one shot.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
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, the total taxable income at age 70 may be lower for some people. 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.
- 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 After this period, the annuity must be purchased and the lump sum withdrawn.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 After this period, the annuity must be purchased and the lump sum withdrawn.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 can be set up anytime.
- During SLW, subscribers can opt for scheme Preference or pension fund manager change. However, it will be applicable only for the lump sum portion. If not already withdrawn, the annuity portion 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.
- It would be better for PFRDA to introduce a separate money-market asset class for the retiree to shift a portion of the lump sum and initial systematic withdrawals from that cash component.
- The PFRDA’s claim (in the above quoted article), “You get higher return and redeem as you go” may not always pan out to be true.
- It is not clear as of now if government emmployees will be allowed the SLW option.
Retirees who can afford to keep the lump sum in the NPS and gradually withdraw it can opt for the SLW. “Afford” here means the retirees have “enough” assest elsewhere and their reliance on the NPS corpus is not high.
The proposed clause, “Partial withdrawal won’t be allowed post-setting up of SLW”, is quite restrive. That said, the SLW is a step in the right direction. It is most useful for retirees who have saved up a large enough corpus to leave the money in NPS and save on tax.
If they had to withdraw the lump sum (which is tax free) and invest it elsewhere, there is a tax incidence upon that withdrawal. With NPS SLW, one can withdraw as necessary and pay no tax. However, this luxury is possible when one has enough liquid assets elsewhere.
In summary, the NPS systematic withdrawl facility can certainly useful to financially independent retirees. However it would be best done from a money market like asset pool instead of long term gilt or corporate bonds (classes G or C). If this remains unchanged retirees must be educated that such systematic withdrawals can be risky as long-term bonds are volatile. Any extended period of poor returns can result in faster depletion of the NPS corpus. So ample precautions are necessary.
🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)