The Pension Fund Regulatory and Development Authority (PFRDA) has now permitted its subscribers to withdraw the entire accumulated pension wealth without purchasing annuity if the pension corpus is less than Rs5 lakh.
As of now, national pension scheme (NPS) subscribers with a corpus of over Rs2 lakh at the time of retirement or attaining the age of 60 years mandatorily need to buy an annuity, offered by insurance companies. For any amount beyond this or on the condition that the beneficiary attains the age of 60, only 60% of the contributions can be withdrawn and utilised, with 40% of the fund earmarked for government-mandated annuity plans.
However, as annuity rates always track the interest rate markets, the returns are in the range of 5% to 6% and the annuity is taxable. So given the current inflation rate, it is a negative return.
This relaxation of existing norms would allow for increased market liquidity and investor participation.
In a gazette notification, the PFRDA also said that the premature withdrawal limit on a lumpsum basis for NPS has been increased to Rs2.5 lakh from Rs1 lakh.
"...where the accumulated pension wealth in the permanent retirement account of the subscriber is equal to or less than a sum of Rs5 lakh, or a limit as specified by the Authority, the subscriber shall have the option to withdraw the entire accumulated pension wealth without purchasing annuity and upon such exercise of this option, the right of such subscriber to receive any pension or other amount under the NPS or from the government or employer, shall extinguish," it says.
This marked shift would allow for increased investments and better returns, given that annuities are known to deliver returns on the lower end of the scale, with the current range being merely around 5% to 5.5%.
The pension regulator has also increased the maximum age of entry into the NPS to 70 years from 65 years. Similarly, the exit age limit has also been extended to 75 years. This would also allow for more people to participate in the government-sponsored pension scheme.
Launched in 2004, NPS offers subscribers the facility to withdraw funds post completion of three years of service, where there is a premature withdrawal limit of around 25% of the entire corpus.
Tax-free partial withdrawals are also permitted for various conditions like education and marriage of children, house construction, and more, which cannot exceed more than three times during the entire tenure.
With Tier 1 NPS account being a pension account and Tier 2 NPS account allowing for investments, it offers a good opportunity for asset allocation to the investor.