NPS annuity vs RIS: Key details investors should know for pension up to 25 years

The new options are available in addition to the traditional annuity option, under which you can invest up to 100% of the accumulated NPS corpus to buy a monthly payout scheme from approved insurers. However, purchasing the annuity with at least 40% of the corpus (or 20% of the corpus under MSF) is mandatory.

So, there are now three drawdown options that investors can use to generate regular payouts in retirement. Here’s a look at key details of each options for pension up to 25 years along with examples.

Annuity plan

Annuity plans usually offer returns in the range of 6% to 6.5%.

Under the annuity option, subscribers get monthly assured payouts. However, the corpus can be exhausted at the end of the drawdown period if the return of premium option is not chosen. However, if the return of premium option is selected, the required corpus will be higher.

Calculation shows that to withdraw ₹1 lakh per month for a period of 25 years from a plan growing at 6.5%, a starting corpus of around ₹1.5 crore would be required.

Systematic Unit Redemption

Under this option, investors can withdraw a fixed number of units from their pension corpus (remaining after the mandatory annuity purchase) as a monthly payout from age 60 to 85.

Here, the value (NAV) of each unit could be crucial for deciding the monthly payouts. As withdrawals are made by redeeming a fixed number of units, the actual amount received each month will depend on the prevailing NAV.

If the NAV rises, the same number of units will generate a higher payout; if it falls, the payout will decrease. This can also affect the monthly payout amount as the NAV can rise during strong markets but fall during correction phases.

For illustration, suppose the value of each unit is ₹10 at the time of the start of the drawdown. To receive ₹1,00,000 per month, you would need to redeem 10,000 units per month. Over 25 years, the total number of units to be redeemed would be: 10,000x12x25 = 30,00,000

Under this drawdown option, the remaining number of units continues to remain invested and grow. As a result, the NAV of each unit may grow over time, increasing your monthly payout amount.

Systematic Payout

Under this option, the monthly payout is calculated based on the Systematic Payout Rate (SPR), which is reset every year on the subscriber's birthday.