Should senior citizens opt for the new NPS systematic lumpsum withdrawal option?

Soon senior citizens can get an additional option under the National Pension System (NPS) of Systematic Lumpsum Withdrawal (SLW) option while withdrawing their monies. This feature will allow NPS subscribers to opt for periodic withdrawal monthly, quarterly, half-yearly, or annually until the age of 75. The subscriber can automate the process by exercising one-time requests. This way, subscribers will now have the following options available at retirement: One-time lump sum withdrawal, SLW, deferment, continuation, etc.

Deepak Mohanty, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), told Business Today, “The functionality is expected to be launched by third quarter of financial year (FY) 2023-24. Post-launch, the functionality would be open to both existing and new subscribers. Also, the new rule will not impact the previous withdrawal rules.”

What are the options available for subscribers to withdraw? 

Three options are available for subscribers to withdraw funds from their NPS corpus. First, exit at maturity: At 60 years or superannuation age, you must purchase an annuity plan with a minimum of 40% of the corpus and and withdraw a lump sum of 60% of the corpus. In case of premature withdrawal, you can withdraw anytime before 60 years. Here you need to purchase an annuity plan for a minimum of 80% of the corpus and withdraw 20% lump sum. The third is partial withdrawal. Under this option, you can withdraw 25% of your contribution on an incremental basis. Premature withdrawal is allowed thrice during a person’s association with the NPS.

How will NPS SLW option work? 

As per statute, the subscriber needs to annuities minimum of 40% of the pension corpus at retirement. For the remaining 60 per cent lump sum component, they can choose an SLW option. Mohanty said, “Any changes in the same, to bring about SWP in the 40% part, would require amendment in the PFRDA Act. PFRDA has proposed an alternate payout method like a systematic withdrawal plan for only the lump sum part of a maximum of 60%.”

Senthil Gunasekaran, Chief Business Development Officer, KFintech, said that in the SLW option, subscribers can select the fixed amount to be withdrawn, the frequency of withdrawal (monthly, quarterly, half-yearly, or annually), and the date on which the transaction should be processed. The rest of the amount will remain invested in the Pension Fund and Scheme of the subscriber’s choice, earning returns."

The subscriber can opt for the SLW facility in both tier-I and tier-II. However, after capturing SLW request, there won’t be any further contribution in tier-I and the amount in tier-I would be earmarked for annuity and lump sum as per exit regulations. Partial withdrawal won’t be allowed post-setting up of SLW.

For tier-II, the SLW can be availed at any point, i.e., even before the age of 60. This is because one can withdraw anytime from tier-II, and when introduced, this facility would act as a monthly income for the subscriber or his/her family members.

Gunasekaran further said, "The PRAN will also remain active until all the corpus is completely withdrawn, and subscribers will have all the entitlements of a regular NPS subscriber, including the ability to make revisions such as changing bank account details or updating their nomination. Additionally, on the unfortunate event of the subscriber's death during the SLW period, the remaining corpus will be transferred to the Nominee’s account. This option is available for the 60% of the corpus the subscriber can withdraw, while the remaining 40% must be invested in an annuity scheme. We believe this will be a valuable addition to the NPS and will benefit subscribers greatly."

Benefits of the SLW option 

1. The choice of SLW at periodical intervals through automation would add flexibility, provide liquidity, and optimise retirement benefits.

2. Enable and empower the subscribers with periodic withdrawal to manage their needs and requirement.

3. Allows the subscribers to participate and reap market-linked investment gains for the amount not withdrawn, which remain in PRAN and remain invested as per the investment choice.

4. Reduce the risk of reinvestment associated with a one-time lump sum withdrawal even though the option shall continue.

What you should know 

The choice of SLW at periodic intervals through automation will give subscriber flexibility, provide liquidity, and optimise retirement benefits. However, Amol Joshi, Founder of Plan Rupee Investment Services, said, "This depends on a few factors like; What will be the taxation of such a withdrawal? A comparable investment in equity or equity hybrid MF will only have a capital gains tax of 10%. Unless the taxation is similar or better, investors will not benefit. "While the monthly, quarterly, semi-annual, or annual withdrawal options are welcome, what also matters is whether the withdrawal will have any amount or % upper cap or investors can choose as per their liking & requirement. In addition, after opting for monthly mode, for example, will there be any restriction in changing the mode? OR any minimum 'gap' between mode change requests."

Joshi added: "In addition to the opted mode, will the further withdrawals be allowed? Many senior citizens have monthly expenses and 1 or 2 lumpsum requirements in a year, like - Vacation OR Health Insurance Premium Payments. In short, unless the proposed facility offers all the similar benefits from comparable products, investors will choose other options from 60% lumpsum withdrawal."

However, Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors, "This is a good additional option for investors as often investors already receive large corpus at retirement typically from other retirement benefits and are anyways evaluating other options to deploy those. Having the flexibility of having these monies continuously managed by the NPS manager and creating a cash flow directly from here may give them more options to decide how they wish to use their overall retirement pool for a combination of cash flows and capital appreciation to beat inflation."