The Pension Fund Regulatory and Development Authority (PFRDA) has proposed to the Insurance Regulatory Authority of India (IRDAI) to allow National Pension System (NPS) subscribers to port their annuity plans. If the proposal goes through, NPS pensioners will be able to change their pension policies, if they are unsatisfied with it.
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In other words, the NPS subscriber is not happy with the returns provided by the plan, they will have the freedom to change the annuity plan.
PFRDA chairperson Supratim Bandyopadhyay told PTI, “We have held discussions with IRDAI and also with the service providers to allow portability. It is in a preliminary stage of discussion”.
In order to understand how this will benefit the pensioners, let’s take a look at current NPS rules.
NPS withdrawal rules
Superannuation: NPS allows subscribers to withdraw the full contributions at one go without purchasing an annuity if the pension corpus is equal to or less than Rs 5 lakh. However, if the accumulated pension wealth in the Permanent Retirement Account of the pensioner is more than Rs 5 lakh, then the account holder may withdraw only up to 60% of this amount; the remaining 40% of this corpus has to be used to buy a government-approved annuity plan. This is the normal route of withdrawal i.e upon superannuation, which means that pensioner has attained the age of 60.
Partial withdrawal: NPS subscribers after three years of joining the scheme are eligible for partial withdrawal to meet their specific needs as permitted by PFRDA. Partial withdrawals are allowed for treatment of life-threatening diseases, for marriage or higher education of children, for purchase/construction of a property, or to start a new venture.
Pre-mature exit – In case of pre-mature exit (exit before attaining the age of superannuation/attaining 60 years of age) from NPS, at least 80% of the accumulated pension corpus of the Subscriber has to be utilised for the purchase of an Annuity that would provide a regular monthly pension. The remaining funds can be withdrawn as lump sum. However, you can exit from NPS only after the completion of 5 years. If the total corpus is less than or equal to Rs. 2.5 lakh, Subscriber can opt for 100% lump sum withdrawal.
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Upon death of subscriber: The entire accumulated pension corpus (100%) would be paid to the nominee or legal heir of the subscriber.
What is annuity & how does it work for the pensioner?
In the context of NPS, annuity refers to the monthly sum received by the subscriber from the Annuity Service Provider (ASP) or IRDAI-approved insurance company. A percentage of the pension wealth as decided by the subscribers (minimum 40% & 80% in case of superannuation & Pre-mature Exit respectively) is utilised for the purchase of an annuity from the empanelled ASPs.
Types of annuity that NPS subscribers can opt for
Annuity for life: On death of the annuitant, payment of annuity ceases.
Annuity for life with return of purchase price on death: Upon death of subscriber annuity payments cease and the purchase price is returned to the nominee
Annuity payable for life with 100% Annuity payable to spouse on death of annuitant: On death of the annuitant, annuity is paid to the spouse during life time. If the spouse predeceases the annuitant, payment of Annuity will cease after the death of the annuitant.
Annuity payable for life with 100% Annuity payable to spouse on death of annuitant with return on purchase of Annuity– On death of the annuitant, Annuity is paid to the spouse during life time and purchase price is returned to the nominee after the death of the spouse.
PFRDA’s proposal
PFRDA chairperson told PTI that the problem is once the annuity product is selected, it cannot be changed anymore except till the initial cooling-off period of 15-20 days. But it is found that many subscribers decide in a hurry and realise afterwards that another option was better and wish to rectify. Currently, there is no option to change annuity plan, once purchased.
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Impact of proposed change
Currently, most insurance give annuity returns in the range of 5.39%-6.81%. Once the subscribers get the portability option they can shift to another insurance provider for a higher return.
