To make the National Pension System (NPS) more attractive, the government could do away with a norm mandating retiring employees to buy an annuity with 40 per cent of their accumulated corpus.
Returns on annuity products that deliver a monthly income to retirees are quite low and the compulsory annuitisation puts off potential investors who may prefer to park their retirement savings elsewhere for better returns, according to Pension Fund Regulatory and Development Authority (PFRDA) Chairman Hemant Contractor.
“The NPS corpus earns a return of close to 10 per cent, but if you put it in an annuity as you are required to, then the annuity starts earning about 7 per cent or so,” Mr. Contractor said. “There is a sharp drop in the earnings and that ultimately affects the pension a person gets,” he said.
Annuity product For premature withdrawals from the NPS before the age of 60, eighty per cent of the amount must be invested in an annuity product. At retirement, 40 per cent of savings must be invested in an annuity, although the PFRDA has allowed retirees to defer the purchase for three years, if the financial markets are in a downturn when they turn 60.
The intent is to ensure people get a monthly income in their sunset years instead of frittering away their entire nest-egg on large expenses at retirement.
“In fact, this is one of the negatives of NPS a lot of people have pointed out, and there is some truth in what they say since the returns on annuities are really quite low. So we have made some suggestions to the government to offer some options in lieu of annuities, such as a systematic or staggered withdrawal plan,” the PFRDA chairman told The Hindu .
Scrapping the annuity requirement altogether would need a change in the PFRDA Act which stipulates an annuity purchase at retirement, but it is possible to reduce the proportion of corpus to be annuitised from the 40 per cent prescribed now.
Higher returns So the PFRDA has proposed a reduction in the mandatory annuity norm, and giving people the option to invest in other products that could offer higher returns, Mr Contractor said. The Finance Ministry is considering the proposal.
Diluting the annuity prescription would spur greater competition between the 12-year old NPS, which is managing Rs. 1.45 lakh crore savings for 3.8 million members, and the Employees’ Provident Fund Organisation (EPFO) which has Rs. 10 lakh crore under its watch.
It may be recalled that the Centre had to backtrack on a Budget proposal this year intended to bring parity between the two retirement savings alternatives, by making 60 per cent of EPF corpus taxable, after widespread furore and an intervention at the highest level.
While he had rolled back the tax on EPF savings, Finance Minister Arun Jaitley made 40 per cent of the NPS corpus tax-free in this Budget. Earlier, the entire NPS corpus was taxable.
Annual deduction Last year, the government had granted an additional annual deduction of Rs.50,000 from gross taxable income for NPS investments over and above the Rs.1.5 lakh deduction permitted for similar investments such as life insurance premia, public provident fund and EPF.
The PFRDA chief said the additional deduction triggered a surge in new NPS accounts, most of which were opened towards the end of the previous financial year.
“Our non-government schemes (accounts opened voluntarily) were not doing that well, but last year we saw a 100 per cent jump in subscribers and this year again, we expect a doubling,” Mr. Contractor said. “Most people only join in the last two or three months of the fiscal year, so we will know then if the 40 per cent tax-free status has helped,” he said.
