The Pension Fund Regulatory and Development Authority’s plan to offer systematic withdrawal plan (SWP)—where an individual can withdraw a fixed sum from his pension fund instead of buying annuities—to National Pension System (NPS) subscribers is a welcome move.
The Pension Fund Regulatory and Development Authority’s plan to offer systematic withdrawal plan (SWP)—where an individual can withdraw a fixed sum from his pension fund instead of buying annuities—to National Pension System (NPS) subscribers is a welcome move. An NPS subscriber has to mandatorily annuitise 40% of the maturity corpus, and rest can be withdrawn as a lump sum. In the last Budget, finance minister Arun Jaitley made withdrawals from NPS on maturity tax-free up to 40% of the total corpus accumulated. In fact, the mandatory annuitisation and sub-optimal, taxable 6-7% returns from annuities are the main reasons why NPS has not picked up in the private sector despite the R50,000 income-tax deduction—over and above the R1.5 lakh deduction allowed under Section 80C of the I-T Act—for NPS contributions. Annuity, being a complex product, does not account for a high proportion of the life insurance business.
SWP or phased withdrawal—as offered by asset management companies—can offer one of the most tax-efficient incomes to meet one’s post-retirement needs. An investor can redeem a predefined amount every month, quarterly, half-yearly or annually. Such an option for NPS, which lets the subscriber keep money with the fund manager after retirement and withdraw it over 15-20 years, will indeed be a tax-efficient option to fund retirement. For instance, if person withdraws a corpus of R100 in 15 equal instalments, or R6.67 per year, in the first year, he will have R93.3 left in the account. As the corpus will earn returns, say 8%, it will become R94.1 in the second year. Over the period 15 years, the corpus will still be R112.7, more than what he had 15 years ago. Thus, the investor can take advantage of compound interest over a longer period, which will result in higher balances. This will also imply that the subscriber will not need to bear costs built into annuities.
The Financial Express