- Date : 15/02/2023
- Read: 4 mins
The introduction of the SLW facility for the lump sum portion will help you make regular withdrawals at the specified frequency. The introduction of the SWP facility for the annuity portion will make NPS the best retirement planning tool.
The current National Pension Scheme (NPS) allows subscribers the option to make phased withdrawals on an annual basis instead of making a lump sum withdrawal of the allowed 60% corpus. However, the subscriber has to submit an annual withdrawal request every year. So, it is time-consuming and lacks flexibility. As a result, very few subscribers opt for it. In this article, we will understand the PFRDA’s proposal to introduce the Systematic Lump Sum Withdrawal (SLW). We will also discuss whether the PFRDA should introduce the Systematic Withdrawal Plan (SWP) facility in NPS on similar lines of mutual funds.
Why is the PFRDA planning to introduce the Systematic Lump Sum Withdrawal (SLW)?
On 29th September 2022, the PFRDA released an exposure draft that outlined the details of the SLW facility that it plans to introduce to the NPS subscribers. Currently, on reaching the retirement age of 60 years, the subscriber has the option to make up to 60% lump sum withdrawal from the accumulated corpus. The remaining corpus has to be used for purchasing an annuity plan that will provide a regular pension.
Instead of making one lump sum withdrawal, currently, the subscribers have the option to make an annual withdrawal from this - up to 60% of the accumulated corpus. However, an individual has to initiate a request for an annual withdrawal every year. As this is a time-consuming process, it has not been adopted popularly by subscribers. To overcome this challenge, the PFRDA is planning to introduce the Systematic Lump Sum Withdrawal (SLW) facility for National Pension Scheme (NPS) subscribers.
How will the Systematic Lump Sum Withdrawal (SLW) work?
The SLW facility will enable the subscriber to make regular withdrawals from up to 60% corpus instead of a single lump sum withdrawal. The subscriber will have to submit a one-time request to activate it. With the SLW facility, the subscriber will be able to avail of regular income after retirement. The subscriber can choose to keep the payout frequency as monthly, quarterly, half-yearly or annually. The subscriber can choose to receive the payouts up to the age of 75 years.
Once the SLW facility has been set up, the subscriber will not be able to make partial withdrawals. Also, once the subscriber opts for the SLW facility, they will not be able to make any new contributions to the Tier I account. The subscriber will be able to avail of the SLW facility for Tier II accounts at any point in time. It means they will not need to wait till the age of 60 years.
The SLW plan is similar to the SWP plan available in mutual funds. The SWP facility provides a regular payout to the mutual fund unit holder at the chosen frequency.
Should the PFRDA introduce the SWP facility for the annuity portion also?
Many subscribers would like the PFRDA to introduce the SWP option for the annuity portion also, along with the lump sum portion. Currently, buying an annuity for a minimum of 40% corpus is mandatory. The subscribers would like to have the SWP as an alternative option to the annuity option.
The SWP option for the annuity portion will give the subscriber the flexibility to choose the amount that they would like to withdraw and the frequency with which they would like to withdraw. However, the key challenge with the SWP option for the annuity portion is how will it address the longevity risk. What if the subscriber exhausts the entire corpus too soon using the SWP option? How will they manage their expenses after that?
So, if the PFRDA plans to introduce the SWP option for the annuity portion, they will have to strike a fine balance between the SWP and the annuity options.
Also Read: How To Invest Monthly In NPS?
Is NPS the best investment product for retirement?
The NPS, in its current form, has many good features. Some of these include easy to register, convenient to use, choice of investment options, up to 60% lump sum withdrawal on retirement, etc. The NPS provides one of the best tax benefits at the time of investment. In September 2022, the PFRDA released the exposure draft for the Systematic Lump Sum Withdrawal (SLW) feature. It has invited stakeholder comments on it. If the PFRDA introduces the SWP option for the annuity portion, it will make NPS one of the best retirement planning products, if not the best.