'Stay invested but progressively reduce risk. Beyond a point, the objective should shift from maximising returns to avoiding unpleasant surprises.'
The National Pension System (NPS) has undergone wide-ranging reforms that alter how investors accumulate, access, and manage retirement savings.
The changes introduce greater flexibility and control but also place the onus on investors to manage longevity and inflation risks.
Lump-sum withdrawal raised to 80 per cent
Non-government subscribers can now withdraw up to 80 per cent of their retirement corpus as a lump sum at the age of 60, compared with 60 per cent earlier.
Subscribers must use the remaining 20 per cent to purchase an annuity.
"The revised rule enhances liquidity at retirement by allowing greater access to funds.
"It also offers increased flexibility by enabling subscribers to invest the additional 20 per cent in asset classes of their choice, which may deliver better returns than annuities," says Kurian Jose, chief executive officer, Tata Pension Management.
A higher lump-sum option, however, increases the risk of mismanagement.
"Poor investment decisions, inflation, and rising life expectancy can gradually erode savings," says Sanjiv Bajaj, joint chairman and managing director, Bajaj Capital.
At present, withdrawals of up to 60 per cent of the NPS corpus qualify for tax exemption under Section 10(12A) of the Income-Tax Act.
"Unless the government amends the tax provisions, the additional 20 per cent withdrawal may attract tax at the subscriber's applicable tax slab rate," says Jose.
Annuity obligation trimmed to 20 per cent
The mandatory annuitisation requirement has been reduced from 40 per cent to 20 per cent.
"NPS subscribers are no longer compelled to lock away a large portion of their retirement corpus in an annuity that typically offers fixed but lower returns," says Jose.
Annuities, however, provide assured lifelong income.
A lower annuitisation level could leave retirees with a smaller pension, which may fall short of meeting their basic expenses in later years.
Age limit extended to 85
Both government and non-government subscribers can now remain invested in NPS until the age of 85.
The change aligns retirement planning with longer lifespans and extended working years.
"Allowing NPS investments up to age 85 enables continued compounding, avoids forced exits at an arbitrary age, and helps retirees combat inflation over a longer period," says Bajaj.
As investors age, capital preservation becomes more critical.
"Stay invested but progressively reduce risk. Beyond a point, the objective should shift from maximising returns to avoiding unpleasant surprises," adds Bajaj.
Five-year lock-in removed
The removal of the mandatory five-year lock-in for non-government subscribers improves liquidity. However, early exits remain restrictive.
"Exits before completing 15 years or before the age of 60 count as premature, requiring 80 per cent of the corpus to be annuitised, with only 20 per cent available as a lump sum.
"Use this option sparingly, as high compulsory annuitisation can severely limit access to capital and disrupt long-term wealth creation," says Abhishek Kumar, a Sebi-registered investment adviser and founder, SahajMoney.com.
How systematic unit redemption works
Systematic Unit Redemption (SUR) allows subscribers to withdraw up to 80 per cent of their eligible lump sum in phases.
The balance remains invested and earns market-linked returns.
"It offers potential capital appreciation, tax-deferred growth, and flexible income.
"But it carries market risk and does not guarantee that the corpus will last a lifetime.
"It suits investors with a higher risk appetite who seek inflation-beating income. Risk-averse retirees should avoid it," says Kumar.
SUR versus annuity
SUR offers flexibility and market-linked growth, along with the ability to pass on any remaining balance to heirs.
An annuity provides a fixed lifelong income at lower return levels.
"While annuities eliminate the risk of outliving savings, SUR exposes retirees to market volatility and the possibility of depleting the corpus early," says Kumar.
Dos and don'ts for subscribers
- Don't chase flexibility blindly, need discipline too
- Secure essential monthly income before trying to optimise returns
- Think in decades, retirement is a 25-30 year journey
- Use advice: Cost of bad retirement decisions far outweighs cost of professional guidance
Source: Bajaj Capital
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Feature Presentation: Ashish Narsale/Rediff
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