Retiring soon? NPS overhaul lets you earn more, withdraw smarter

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced significant changes to the National Pension System (NPS), launching new Retirement Income Schemes (RIS) and flexible drawdown options designed to enhance post-retirement income management.  The reforms seek to address a long-standing concern among subscribers — the lack of flexibility between compulsory annuity purchases and managing a large lump sum independently after retirement.

Traditional annuity route

Under existing NPS rules, subscribers retiring at age 60 could withdraw up to 60% of their accumulated corpus tax-free, while at least 40% had to be compulsorily used to purchase an annuity that provides a lifelong pension.

For example, a retiree with a ₹1 crore corpus could withdraw ₹60 lakh tax-free, but the remaining ₹40 lakh had to be invested in an annuity product.

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However, annuity products have often drawn criticism because of relatively low payouts and limited flexibility. A ₹40 lakh annuity purchase typically generated pension income of around ₹18,000–22,000 per month. Once purchased, the money remained locked with little opportunity for future growth.

At the same time, retirees withdrawing a large lump sum often faced challenges in managing investments over a retirement period that could extend for another two to three decades.

The regulator's latest move aims to create a middle path.

Retirement Income Scheme

PFRDA has launched the Retirement Income Scheme (RIS), a dedicated investment framework designed specifically for the post-retirement stage.

The scheme uses an age-based investment allocation model, commonly referred to as a "glide path."

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At age 60, the asset allocation will begin with:

Asset Class    Allocation Equity    35% Corporate Bonds    10% Government Bonds    55%

Under the framework, equity exposure will reduce by 2 percentage points every year after age 60. By age 75, equity allocation will decline to 10% and remain at that level until age 85.

The structure aims to provide growth potential during early retirement years while gradually shifting toward greater stability as subscribers age.

Industry experts note that a retiree at 60 may still have an investment horizon of over 20–25 years, making some exposure to equities beneficial.

Two payout methods

PFRDA has also introduced flexible drawdown options allowing retirees to receive periodic income while keeping their retirement corpus invested.

The regulator has proposed two methods:

1. Systematic Payout Rate (SPR)

SPR calculates annual payouts using the formula:

Payout Rate = 1 ÷ (85 – current age)

At age 60, the payout works out to approximately 4% annually. At age 80, the payout rate rises to 20%.

The payout amount will be recalculated every year based on the retiree's age and prevailing corpus value. Strong market performance could result in higher payouts, while weaker returns may lower income.

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2. Systematic Unit Redemption (SUR)

Under SUR, subscribers redeem a fixed number of units each month.

For instance, an ₹80 lakh corpus with a net asset value (NAV) of ₹10 would create 8 lakh units. For a 25-year payout period, around 2,666 units would be redeemed monthly.

While units remain fixed, the payout amount fluctuates according to market performance and NAV movement.

Mandatory annuity rule

Importantly, the new drawdown framework does not replace the mandatory annuity requirement under NPS.

The compulsory annuity allocation of 20% or 40%, depending on applicable rules, remains unchanged. The drawdown mechanism will apply only to a separately designated portion of the retirement corpus.

The operational rollout date for these changes is yet to be announced, but the reforms represent one of the most significant upgrades to NPS retirement flexibility in recent years.

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