Pension regulator, PFRDA recently released an exposure draft on the introduction of systematic lumpsum withdrawal (SLW) for NPS subscribers. While it is still in the proposal stage, here’s explaining what this is all about and when and whether it will make sense for NPS subscribers to avail this option when implemented:
Is the proposal to allow lumpsum withdrawal new?
The idea is not totally new. Currently, on attaining 60 years or on superannuation, NPS subscribers need not pull out the permitted lumpsum withdrawal immediately (i.e., 60 per cent of the total corpus. The remaining 40 per cent needs to be compulsorily invested in an annuity product). You can defer withdrawal of lumpsum until 75. Even as you defer, you have an option to withdraw from the lumpsum portion once a year in a phased manner by initiating a request each time you want to exercise this option. Withdrawal can be in terms of defined units or amounts.
What is new then?
Two things are new — one, periodicity of withdrawal and two, ease of withdrawal. It is now proposed that the lumpsum can be pulled out systematically monthly, quarterly, half yearly or annually until 75 years or as per the choice of the subscriber. Further, the process will be automated based on one-time online/offline request and hence, the subscriber need not initiate the withdrawal from her side each time. The other new thing to note is that once you initiate SLW, while you can change scheme preference or the pension fund manager through the years, you cannot make any further contribution in Tier I accounts. Even as you do SLWs, you lumpsum corpus can fluctuate based on market performance. If you change your mind about the frequency or the length of the SLW, you are allowed to modify your choices. You can also cancel the SLW and redeem the lumpsum entirely at any time.
Is SLW available for NPS Tier II accounts also ?
NPS Tier II account can be opened and held as long as one has a Tier I account. It allows withdrawals at any point. Hence, SLW can be availed at any point in time, and one need not necessarily do it at 60. Unlike Tier I, contribution shall be allowed in Tier II along with SLW.
Are there any changes proposed to the annuity portion?
No. As mentioned earlier, at the time of maturity or withdrawal, 40 per cent of the NPS corpus has to be compulsorily invested in an annuity product. Even now, subscribers can either opt for annuity immediately or defer annuity till 75 years. In case of deferment, equivalent annuity units/amount will be blocked till the deferment period. At the end of deferment, this portion will be redeemed and amount transferred to concerned Annuity Service Provider chosen by the subscriber for policy issuance. During the deferment period, value earmarked for annuity will fluctuate depending on the market performance.
What are the benefits of SLW?
Regular income to replace a salary after retirement is a key criterion for senior citizens. Retirement vehicles such as EPF, NPS etc. pay out a lumpsum on superannuation and it is left to the investors to do their homework and find good avenues to reinvest these sums, to get regular income out of the same. While savvier investors can do this, many may not have the ability to do good homework. To an extent, compulsory annuitisation of 40 per cent of the corpus serves this purpose. Now, PFRDA is providing a regular income option for the lumpsum portion as well, which can be exercised until 75 years of age.
Long-term returns on NPS schemes are reasonable. Scheme E (equities) has returned 11-12 per cent annually over longer periods of 7-10 years; Scheme C (corporate bonds), 7-9 per cent during the same period and Scheme G (government securities), 7-8.6 per cent. Of course, your personal return will depend on the combination you have chosen. You can invest a maximum of 50 per cent in Scheme E after 60, under ‘active choice’ option. Since subscribers are allowed to change allocations among equity and debt portions as well as pension fund managers during the SLW period, the savvier ones can try and optimise their risk-return for the remaining corpus even as they continue to withdraw for their regular needs.
Will SLW suit you?
The risk-return you are willing to take as well as the taxation is the tipping point for your decision making. Even as you can make regular withdrawal of a fixed sum, your corpus will fluctuate based on market conditions. This will be the case even if you choose purely Scheme C or G or a combination of both. If you are risk averse, SLW may not be right for you for post retirement needs. Unlike NPS, in long-term debt investment options such as PM Vaya Vandhana Yojana, Senior Citizen Savings Scheme and RBI Floating Rate bonds, your corpus does not fluctuate; These instruments are zero risk and provide regular income too. Returns, if you lock in, now stand at 7.6 per cent for SCSS, 7.4 per cent for PMVVY. For the RBI bonds, 7.15 is offered now — a spread of 35 bps over the NSC. Returns on these products compare favourably with Schemes C and G. In a high interest rate scenario, you can also lock into bank FDs offering over 7-8 per cent returns. However, NPS lumpsum withdrawals are tax free. In the other instruments, the interest is taxed at slab rates.
While signing up for an immediate annuity product using the lumpsum is an option for risk-averse investors, returns on most of these products are less than 7 per cent as mentioned in our recent article. Annuity interest is also taxed at slab rates. Besides, already 40 per cent of your corpus will be moved to annuity. Hence, you may want some variety to optimise your returns.
Debt mutual funds such as corporate bond funds, banking & PSU funds and even gilt funds can be alternatives to the NPS Schemes C and G. Systematic Withdrawal Plans (SWPs) can be initiated after investing the lumpsum. Their returns compare well with Schemes C and G over a 10-year period. Some other categories of funds can provide higher returns, if you can take higher risk.
However, MFs suffer capital gains tax based on asset class (equity/debt) as well as period of holding, though there is solace from indexation benefit for long-term capital gains in debt funds and exemption up to ₹1 lakh gains from LTCG in case of equity oriented funds.
Finally, if you choose to do SLWs, you may run the risk of exhausting your corpus soon by high regular withdrawals. Hence, as in mutual fund SWPs, a certain planning may have to be done with respect to the rate of withdrawal vis-à-vis the long-term return expectation. Even then, at 75 when the NPS door shuts, you will again have to hunt for suitable options if you are left with a sizeable lumpsum. Net-net, there is no escaping being nimble on your feet.