Kolkata: PFRDA or Pension Fund Regulatory and Development Authority, which regulates National Pension System or NPS, has introduced flexibilities in the
system which allows subscribers to opt for periodic payouts from their retirement corpus instead of a one-time 60% withdrawal of the full corpus. The remaining portion can be retained with NPS for market-linked growth. These are called Retirement Income Schemes or RIS. According to the PFRDA, the withdrawal options are targeted at improving “cashflow predictability during the retirement phase and corpus longevity of the subscriber”. The circular outlining these changes were issued on May 15. before this change, NPS subscribers could take out up to 60% of their total corpus at retirement and retain at least 40 per cent to purchase an annuity. An NPS subscriber could take out the initial lump sum at one go. The latest move of the pension regulator has been likened to the systematic withdrawal plan or SWP in mutual funds.
Better management of regular income needs
Under the new system, NPS subscribers can decide which payment option is better for them — monthly, quarterly, or annually from the lump sum. At every step the remaining money will be kept and managed by NPS. What is important is that these withdrawals will continue alongside the annuity income that will flow from NPS.
PFRDA thinks the new structure can help retirees manage regular income needs without exhausting their corpus too quickly, which was possible if a lump sum was paid at retirement. PFRDA also stated in its circular that the new facility “shall have no impact on the mandatory annuitisation requirement of 20 per cent or 40 per cent of the corpus”.
RIS Steady to balance risk and growth
PFRDA said RIS will follow an annual glide path model known as “RIS Steady”. The equity exposure will gradually decline with age in this system. The amount of money invested in stocks will go down from 35% at age 60 of the subscriber to 10% by the time he/she reached 75. It will remain at 10% until age 85. As is evident, it is to balance growth and risk with advancing years.
Drawdown option methods
For payouts, NPS subscribers can choose either Systematic Payout Rate (SPR) or Systematic Unit Redemption (SUR). Under SPR, payouts will depend on the subscriber’s current age and selected drawdown end age. But SUR, or Systematic Unit Redemption, works through redemption of a fixed number of units periodically.
Let us take the example of an NPS subscriber who is retiring at 60 with Rs 80 lakh corpus under drawdown. Suppose the subscriber holds 8 lakh units (assuming NAV at Rs 10). If the drawdown period is considered to be 25 years with monthly payouts, the number of units redeemed every month would be the following:
