MUMBAI: The systematic withdrawal scheme introduced under the National Pension System (NPS) provides retirees with a facility to deploy their retirement corpus and have their funds managed in a cost-efficient manner.
The NPS has already demonstrated its ability to outperform most retirement funds in terms of returns. Previously, a subscriber, on exit from NPS, did not have the option to systematically withdraw the 60% corpus after purchasing the annuity with the 40%.
With the introduction of the systematic lumpsum withdrawal feature, one can choose to remain invested with 60% of the corpus in NPS and enable the SLW feature while the corpus continues to grow.
“The NPS product now allows you to keep the account live and contribute up to the age of 75 and enjoy growth in the corpus. The product matures at 75 – at which time one has to compulsorily exit from the scheme. At this age, on exit, an individual could potentially enjoy a higher annuity rate while benefiting from the full withdrawal of the remaining 60% as a tax free lumpsum,” said Sriram Iyer, CEO of HDFC Pension Management.
The systematic withdrawal scheme enables investors to withdraw a fixed amount in instalments for post-retirement expenses, while deferring their annuities to secure better monthly returns. “Unlike life insurance, which becomes costlier with age, guaranteed annuities get more attractive with higher rates at higher ages.”
This facility works well for individuals who have built a sizeable corpus under voluntary pension contributions. “In the high net worth category, people tend to defer withdrawals. They may not need the cash flow, or they might be looking for better returns. Annuity rates also improve with age. Govt employees, who typically have a smaller corpus, tend to annuitise at 60 because they need the income,” Iyer said.
On taxation, Sriram noted that interpretations vary. One perspective is that the gains portion of the withdrawal may be taxed like mutual funds, while another suggests that the 60% tax-free corpus may also allow tax-free systematic withdrawals.
For those saving for retirement and unsure about liquidity needs, the tier-2 scheme of the NPS offers a good option.