PFRDA set to provide a better option than annuities to NPS members

Mulls raising threshold to Rs 5 lakh from current Rs 2 lakh for exemption from annuity requirement, hiking maximum age to 70 yrs from 65 yrs for NPS entry, a minimum guaranteed product, on-tap license

The pension fund regulator, Pension Fund Regulatory and Development Authority (PFRDA), is considering coming out with a better option for National Pension System (NPS) subscribers than the one offered by the current low-return annuities.
 
Experts said the proposed move would give investors greater flexibility to utilise their pension funds at the time of withdrawal, but cautioned against doing away with annuity.
 
Currently, every subscriber, whose accumulated fund has crossed Rs 2 lakh at the time of retirement or at 60 years of age, has to park 40 per cent of the fund in annuity, giving negative returns after adjusting for tax and inflation, said PFRDA Chairman Supratim Bandyopadhyay on Thursday.
 
Although funds transferred to annuity products are not taxed at the time of such transfers, these are taxed at the time of withdrawal.
 
“We are thinking of payout schemes. After retirement, 40 per cent transfer to annuity products is mandatory. Annuity is paid by the Insurance Regulatory and Development Authority of India-controlled insurers,” said Bandyopadhyay.
 
Bandyopadhyay said annuity products vary between 5 per cent and 6 per cent, but most insurers give 5-5.5 per cent interest.
 
“If you consider the tax component and rate of inflation, the real returns are negative. We are thinking of giving a choice to our subscribers of retaining even 40 per cent with our pension fund managers (PFMs). We have systematic withdrawal plans (SWPs). We also have a mixture of SWP and annuities. We are also looking at models adopted by other countries,” he added.

 
Mrin Agarwal, founder-director at Finsafe, said this was a good move, as it gave greater flexibility to investors to utilise the retirement corpus.   “Unlike pension, which is taxable, the SWP option may be made more tax efficient,” said Agarwal.
 
Deepesh Raghaw, founder, PersonalFinancePlan, said annuity is a relatively rigid product. “With SWP, the investor gets greater flexibility. However, the regulator could impose certain conditions,” he said.
 
On the flip side, Raghaw said an annuity could guarantee income for life. “This is something an SWP cannot do. The very purpose of a pension plan is to guarantee lifelong income after retirement.”
 
There is currently a threshold of Rs 2 lakh up to which a subscriber can withdraw the entire money and need not park 40 per cent in annuities. Bandyopadhyay said the PFRDA was looking at increasing the threshold to Rs 5 lakh. He clarified that the option for annuities would always be there.
 
Pankaj Mathpal, founder and managing director, Optima Money Managers, said this would give more flexibility to investors. “Against a corpus of Rs 5 lakh, the pension would be too insignificant and may not help achieve the desired objective. A choice of withdrawing lump sum would help the subscriber utilise the money better,” he said.
 
The PFRDA is also considering permitting persons to enter NPS at the age of 70, against the current cap of 65.
 
Around 15,000 people chose to enter NPS over 60 years of age in the last three and a half years. “It’s an enhancement in the feature of the product. I don’t think too many people would benefit from it. Senior citizens would want to withdraw from a pension fund instead of investing in it,” said Mathpal.
 
On-tap license
 
The PFRDA would enable interested PFMs seek license on tap.
 
“Later this month, there could be a circular from us stating PFMs are allowed on tap for 45 days or a month,” said Bandyopadhyay.
 
Bandyopadhyay said the regulator would assess the experience of on-tap license before extending it further.
 
Minimum guaranteed product
 
The PFRDA will start the process of designing such a product. It will float RFPs in the next 15-20 days for actuaries to do so.
 
However, the regulator cautioned that such a product would require more than the minimum paid-up capital of Rs 50 crore. The PFRDA had increased the floor from Rs 25 crore, which was needed till 2020-21.
 
The minimum guaranteed product is part of the PFRDA Act, but is yet to be implemented.
 
Delink FDI cap
 
Bandyopadhyay said discussions were on with the government on delinking foreign direct investment (FDI) cap in the pension sector with the one in the insurance sector.
 
According to the PFRDA Act, the FDI cap in the pension sector is to be automatically altered in line with that in the insurance sector. While the government has increased the cap to 74 per cent in the latter, it is yet to do so in the former.
 
NPS in numbers
 
The total assets under management (AUM) grew 38.6 per cent to Rs 5.78 trillion in NPS despite Covid-induced lockdowns impacting the economy. Bandyopadhyay said he was not sure if AUM would increase by 38 per cent in 2021-22, but said he expected it to be over 30 per cent.
 
He said subscribers to NPS rose 23 per cent to an additional 600,000 as on March 31. He expects them to rise to 1 million in the current fiscal year.