How and how much pension is received after retirement under NPS? Understand the complete calculation..
NPS Retirement Planning: Many people invest in the National Pension System (NPS) for retirement planning. However, many are unaware of exactly how much lump-sum money and pension they will receive after retirement.
The funds accumulated in the NPS during one's working years are utilized in two parts upon retirement. One part can be withdrawn as a lump sum, while the other is used to purchase an annuity. It is this annuity that provides the regular pension. Therefore, at the time of retirement, alongside the total accumulated corpus, it is crucial to consider the amount being allocated to the annuity.
How is the NPS corpus disbursed upon retirement?
For central government employees, a maximum of 60% of the NPS corpus can be withdrawn as a lump sum upon normal retirement. An annuity must be purchased with at least 40% of the corpus; however, one can choose to allocate more than 40% to the annuity if desired.
The pension received after purchasing an annuity depends on the chosen plan and the prevailing rates at that time. Pension amounts can vary across different options. Consequently, one cannot determine the exact monthly pension solely by looking at the total accumulated NPS corpus.
Understanding the calculation with a ₹50 lakh corpus
Suppose an employee has an accumulated NPS corpus of ₹50 lakh at the time of retirement. If they withdraw 60% as a lump sum, they will receive ₹30 lakh.
The remaining ₹20 lakh will be used to purchase an annuity. For the sake of this example, let us assume the annuity yields an annual return of 7%. In this case, the annual pension would be:
₹20 lakh × 7% = ₹1.40 lakh
This translates to a monthly pension of approximately ₹11,667. The 7% rate used here is for illustrative purposes only; the actual pension will depend on the annuity option selected and the rates available at the time.
Total NPS Corpus | Lump-sum Amount (60%) | Amount for Annuity (40%) | Monthly Pension at 7%
₹25 lakh | ₹15 lakh | ₹10 lakh | ₹5,833
₹50 lakh | ₹30 lakh | ₹20 lakh | ₹11,667
₹75 lakh | ₹45 lakh | ₹30 lakh | ₹17,500
₹1 crore | ₹60 lakh | ₹40 lakh | ₹23,333
₹1.5 crore | ₹90 lakh | ₹60 lakh | ₹35,000
**What pension will be generated if ₹1 crore is accumulated?**
Let us assume there is an NPS corpus of ₹1 crore at the time of retirement. Out of this, 60%—i.e., ₹60 lakh—can be withdrawn as a lump sum.
The remaining ₹40 lakh will be invested in an annuity. If we assume an annual rate of 7% for the sake of example, this would generate an annual pension of ₹2.80 lakh, or approximately ₹23,333 per month. Please note that ₹23,333 is not a fixed NPS pension amount; this is merely a calculation based on a hypothetical 7% rate.
**The choice of annuity is also crucial**
Various options are available when purchasing an annuity. Some options provide a pension to the individual for their entire lifetime. Certain options include a provision for the pension to continue for the spouse as well. Some plans also offer the option to return the original principal amount invested in the annuity upon death.
The terms and conditions for these options vary; therefore, the pension amount received may change depending on the option selected.
**Building a large NPS corpus alone is not enough**
When planning for retirement, it is not sufficient to look only at the total amount accumulated in the NPS. It is also essential to consider what portion of that amount will go towards the annuity and what type of annuity is selected.
For instance, with a corpus of ₹1 crore, if 40% of the amount is invested in an annuity, the pension will be generated from that ₹40 lakh. However, if an individual invests a larger amount in the annuity, the regular pension payout can also increase.
**Rules vary across different NPS accounts**
The rule requiring 60% to be taken as a lump sum and 40% invested in an annuity applies to Central Government employees retiring under the NPS. Rules regarding other NPS models and premature withdrawals may differ. Therefore, it is essential to check the specific rules applicable to your NPS model and retirement scenario.
Ultimately, the post-retirement pension under the NPS depends on the amount invested in the annuity and the applicable annuity rate. Thus, while building a substantial NPS corpus is important, it is equally crucial to understand how that amount will be utilized at the time of retirement.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
