NPS Rules: The National Pension System (NPS) is commonly believed to require full withdrawal and account closure at age 60, but the Pension Fund Regulator (PFRDA) offers an alternative approach. If retirees opt not to withdraw all funds immediately, they can keep their money invested in the market, allowing it to continue growing after turning 60.
PFRDA provides options like ‘Deferment’ and ‘Systematic Lumpsum Withdrawal’ which enable pensioners to benefit from compounding on their NPS savings until the age of 75.
How does the NPS money grow post-60?
When retiring, individuals have two choices to manage their total savings for continued growth:
1. Deferment: By delaying lump sum withdrawals or annuity purchases until age 75, the money stays invested in equities (E) and bonds (C & G), potentially earning market-linked returns of 8% to 12% annually.
2. Systematic Lump Sum Withdrawal: This rule allows withdrawing 60% of the lump sum in regular installments, while the remaining amount continues to earn interest and grow.
Immediate withdrawal can lead to significant losses due to:
Low interest rates on bank savings accounts or Fixed Deposits (FDs) compared to the growth potential of NPS (6.5% to 7.5% vs. 9% to 11%).
Tax implications where the interest earned on FDs becomes fully taxable based on the individual’s tax bracket.
According to PFRDA rules, if someone has a Rs 1 crore NPS corpus at 60, it’s advisable not to withdraw the entire amount immediately to benefit from continued growth opportunities. It’s important for NPS subscribers to remember these key points at retirement:
1. Allocate a minimum of 40% towards purchasing annuity, providing a monthly pension for life.
2. Retain the flexibility to manage the account until age 75 by opting for lump sum withdrawals or starting a pension at any time.
3. Ensure nomination details are up to date to prevent interruptions in receiving pension or installment payments.