In order to protect retirees from market volatility, PFRDA, the pension regulator, has come out with new guidelines stating that your NPS investments will be monetized if you do not withdraw or purchase annuity at the time of retirement.
Before I discuss this new circular by PFRDA, let’s do a recap of exit rules for NPS.
Exit from NPS at the time of Retirement
At the time of retirement (superannuation), at least 40% of the accumulated corpus shall be used to purchase annuity plan. Remaining amount can be withdrawn as lump sum.
You can defer purchase of annuity by up to 3 years.
You also have an option to defer withdrawal of lump sum till the age of 70. You can withdraw lump sum amount in up to 10 annual installments till the age of 70.
You corpus remains invested and continues to earn market linked returns till such time you withdraw the amount completely from NPS.
If the accumulated corpus is less than Rs 2 lacs (for any NPS Subscriber), there is no mandatory purchase of annuity. You can withdraw the entire corpus.
Additional Point for All Citizens Model (including Corporate Sector NPS)
You can also continue investing in NPS post retirement till the age of 70. This provision is not applicable for Government Sector NPS subscribers.
Must Read: Revised Exit and Withdrawal Rules for NPS
Premature Exit from NPS
If you exit before retirement (premature exit), at least 80% of the accumulated corpus shall be used to purchase annuity. Remaining can be withdrawn as lump sum.
If the accumulated corpus is less than Rs 1 lacs (for any NPS subscribers), there is no mandatory purchase of annuity. You can withdraw the entire corpus.
Additional Point for All Citizens Model (including Corporate Sector NPS)
You can exercise this option of premature exit only if you have subscribed to NPS for a minimum period of 10 years. There is no such restriction for Government NPS subscribers.
Must Read: Tax Benefits for investment in NPS and Tax Treatment at Maturity (Updated)
NPS gives you many options at the time of exit. However, you have to exercise these options.
Central Record-keeping Agency (CRA) is not aware of your intentions. You must tell CRA.
What if you don’t? (New Guidelines from PFRDA)
As per the circular from PFRDA dated June 9, 2016, if you don’t specify our preference in withdrawal form a month before maturity, your investments in NPS will be liquidated (automatically monetized) and put in bank account with Axis Bank (trustee bank). Hence, your investment in NPS will no longer earn market linked returns. This is to protect your NPS corpus from market volatility.
The type of bank account your money will go into is still not decided. The circular mentions an account preferably with an auto-sweep facility. In any case, I doubt PFRDA would consign you to 4% p.a. interest rate.
Monetization does not mean that money will be credited to your account. The money will remain with NPS. It is just that it will no longer earn market linked returns. You still need to submit forms/make request for lump sum withdrawal and purchase of annuity.
The provisions of the circular will become effective from August 1, 2016.
The new guidelines affect you in two scenarios:
- Subscribers who have superannuated or achieved age of 60 years but have not lodged their withdrawal claims
- Subscribers who had deferred purchase of annuity or lump sum withdrawal but have not claimed these amounts after completion of such deferment period OR those who have withdrawn lump sum amount but have not purchased annuity
At the time of retirement or turning 60
CRA will inform you of the impending exit from the system six months in advance.
If the CRA does not receive the withdrawal application within 1 month from the date of retirement (superannuation) or turning 60, the system will automatically monetize your entire NPS investment and move it into separate Withdrawals account held with Trustee Bank by NPS trust.
The interest accrued on such amount will be credited to your account on annual basis.
If you want to defer withdrawal or annuity purchase or continue contribution (only for all citizens model), you must indicate your choice in the withdrawal application form.
The form must be received before retirement or attaining the age of 60 (as may be applicable).
If you do that, your NPS investments won’t be monetized and continue to earn market linked returns.
At completion of deferral period
If you had chosen to defer lump sum withdrawal/ annuity purchase or had chosen to continue contribution, the same process is followed at the time of completion of deferral period.
CRA will inform you six months before completion of deferral period. You must respond within 1 month (before) of the date of vesting. If you don’t do that, your entire NPS wealth will be monetized.
What should you do?
Specify your options well in advance.
NPS gives you an option to defer lump sum withdrawals and annuity purchase. It offers an option to continue investing in NPS even after retirement. However, you need to communicate your preference/decision to CRA (NSDL). In absence of any such communication, CRA will monetize your investments to protect your retirement savings from any market volatility.
If you are nearing retirement, you must keep these guidelines in mind.
2 thoughts on “NPS Subscribers nearing Retirement: Be aware of monetization rules”
Any thoughts as to 40% of what corpus would be exempt if 1) annuity commences at 63 & lumpsum withdrawn at 70 & no contribution or 2) opt to contribute till 70, with annuity purchase at 63 & lumpsum withdrawal at 70? Is there clarity or is it gray area? What should one do?
I get your point.
To be on the safer side, it is 40% of the accumulated corpus at the time of retirement. So, it is better that you withdraw 40% upfront.
You can’t contribute and draw annuity income at the same time.