Retirement Pension: The National Pension System (NPS) previously mandated that at least 40% of the retirement fund had to be invested in an annuity to ensure a guaranteed monthly pension. However, new rules have given investors more flexibility. Now, you can withdraw up to 80% of your retirement corpus as a lump sum and invest only 20% in an annuity. This provides more cash in hand, but also increases the risk of a lower monthly pension.
However, this rule does not limit annuity investment to only 20%. Investors can invest more than 20% in annuities according to their retirement needs and risk profile. In fact, the maximum limit for annuity investment in NPS is 100%.
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The amount of the monthly pension depends on how much money you invest in the annuity. Now, we will understand in simple terms, based on two different scenarios, how much investment is required to receive a pension of Rs 1 lakh every month.
Two rules for NPS pension calculation
Let’s assume the starting age is 35 years and the retirement age is 60 years. The total investment period is 25 years. The estimated return during the investment period is assumed to be 10%, and the return on the annuity after retirement is assumed to be 6%. The target pension is Rs 1 lakh per month (Rs 12 lakh annually).
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20% Corpus in Annuity
In this option, to receive a monthly pension of Rs 1 lakh after 25 years of investment, it will be necessary to invest Rs 76,000 every month. During this period, the total investment will be Rs 2.28 crore, and the total corpus (with a 10% return) will reach Rs 9.45 crore. The annuity portion will be Rs 1.9 crore, and at a 6% return, the monthly pension will be Rs 1 lakh.
80% Corpus in Annuity
In this option, a monthly investment of just ₹19,000 will be sufficient to receive a monthly pension of ₹1 lakh after 25 years of investment. The total investment will be ₹57 lakh, and with a 10% return, the corpus will grow to ₹2.54 crore. The annuity portion will be ₹2.03 crore, and at a 6% return, the monthly pension will be ₹1 lakh.