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NPS pension benefits are not same for voluntary and normal retirement

Following a recent amendment, pension benefits under NPS have been allowed for those central government employees who retire voluntarily. The Ministry of Finance had issued a notification in this regard on July 23, 2019.

However, did you know that these benefits are different from those available to those retiring on superannuation (normal retirement at the age of 60 years)? Central government employees taking voluntary retirement would have to mandatorily invest 80 percent of the National Pension System (NPS) retirement corpus in an annuity and the balance 20 percent would be paid to them as a lump sum which is fully taxable. In comparison, those retiring on normal superannuation are required to invest only 40 percent of the corpus in an annuity and the balance 60 percent is payable as a lump sum which is tax-exempt.

As per the amended Pension Fund Regulatory and Development Authority (PFRDA) (Exits and withdrawals under the NPS) Regulations, 2015, the rules for voluntary retirement/exit and the benefits available under NPS to central government employees who voluntarily retire are as follows.

1) Employees can retire anytime to avail pension benefits
Central government employees are now allowed to voluntarily retire (exit prior to age of superannuation) from service and still be eligible for pension under NPS. Earlier, central government employees were eligible for pension only if they completed a minimum of 20 years of service. However, this restriction of 20 years has now been removed for voluntary retirement benefits under NPS.

2) Voluntary retirees lose tax benefit on lump sum
If you voluntarily retire, then at least 80 percent of the accumulated pension corpus has to be mandatorily used to buy an annuity and the remaining 20 percent will be paid as lump sum (which will be taxable).

Prableen Bajpai, Founder, Managing Partner, FinFix Research and Analytics said that in case of voluntary retirement, at least 80 percent of the accumulated pension corpus shall mandatorily be utilised for purchase of annuity while the remaining 20 percent will be paid to the subscriber as a lump sum amount. For instance, a person who has Rs 20 lakh at the age of 45 will be allowed to withdraw only Rs 4 lakh, i.e., 20 percent of the sum, and this amount will be taxed as per the subscriber's applicable tax slab. The remaining Rs 16 lakh has to be used to buy an annuity, which is not subject to taxation at that point.

"So, from a pure taxation point of view, 20 percent of the corpus is subject to taxation while 80 percent of the corpus is exempt from taxation since it is used for purchase of annuity although the annuity income paid in subsequent years is taxed. However, if we add the accessibility aspect along with taxation, the amount which can be freely withdrawn without any tax implications is nil vis-à-vis 60 percent in regular retirement withdrawals," Bajpai explained.

When a person retires earlier, it is normally expected that his/her post-retirement life would be longer (unless one takes up a second career). Consequently, the person would be expected to need more money to sustain post retirement. This is likely to be the reason why a larger percentage of the person's retirement corpus (80 percent instead of 40 percent in case of normal retirement) is required to be mandatorily invested in an annuity.

3) Benefit of retirement, death gratuity extended to government employees
As per the Department of Pension and Pensioners' Welfare, the benefit of retirement gratuity and death gratuity has been extended to government employees covered under NPS on the same terms and conditions as are applicable under Central Civil Services (Pension) Rules, 1972.

Investing the remaining 20 percent lump sum amount
When you retire early, the number of years for which you need to plan your investment for retirement increases. Amol Joshi, Founder, Plan Rupee Investment Services said, "In such a situation, the strategy would actually vary as per your risk appetite and investment horizon."

He said, "If you are risk averse, then you can choose fixed income options like debt mutual funds. Debt mutual funds have many advantages including indexation benefit. And also, debt mutual funds can be used with SWP (Systematic Withdrawal Plan) to have regular income stream coming to your Bank Account. If you are an aggressive investor (risk taker) and in case you have 5-7 years or more investment horizon, you may choose to invest in Equity oriented mutual funds. In case you think valuations are at fair value+ zone, you may choose STP mode of investing."

Mrin Agarwal, Founder and Director Finsafe, a Bangalore based financial education firm, said, "I would recommend investing the balance 20 percent in other investments (for example equity, debt funds). With 80 percent of the accumulated corpus invested in an annuity, which yields around 4-5 percent (at present), the balance can be invested in debt funds or equity funds based on the investor's risk appetite. This can be done to improve the returns on the corpus."

Since this will have to take care of you and your post-retirement needs, make sure you select the schemes keeping in mind factors like your risk appetite, taxation, liquidity and portfolio of the mutual fund scheme itself. As always, in case you are not sure of any of these aspects, seek help of an advisor.
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