NPS vs Annuity Plans: Difference Between Annuity and Pension

Making the decisions concerning saving for your post-retirement life can be daunting. However, planning for retirement ahead of time allows you to enjoy those years in peace. The article below goes over some important details that you should know before deciding which investment choice is best for you. Here is a comparison of annuity plans and NPS.

What Is NPS?

The National Pension Scheme (NPS) is a government-run social security programme. All employees in the public, private, and unorganised sectors are eligible to participate in this pension plan. It encourages people to contribute to an NPS account for retirement benefits on a regular basis during their working lives. When you retire, you will receive a monthly pension based on the amount of money you have saved over time.

What are annuity plans?

An annuity plan is a financial instrument that, following a lump-sum investment, provides you with guaranteed annual payments for the rest of your life. The life insurance company invests your money and then pays you back the profits. You may think of it as a payment paid to you in lieu of a pension.

Comparison between the NPS and annuity plans

 NPS is a pension plan in which an employee pays to their pension from their monthly paycheque, along with a retirement benefit from the employer. On the other hand, annuity plans enable investors to receive a regular payment for the rest of their lives after making a lump sum investment.

An annuity scheme is one in which a life insurance company invests the investor's money and then pays back the profits. Some investors may prefer annuities since they allow them to accumulate a larger sum of money.

However, due to the cheap fees and variety of investment funds available in the current format, NPS may outperform annuity plans.

Contribution at a minimum

The least amount that can be invested in NPS is Rs. 6,000 per year. It will be between Rs. 18,000 and Rs. 24,000 for annuity plans.

Mode of investment

Up to 75% of investments in NPS can be made in equity. This means that long-term capital gains are possible for investors. Annuity programmes, on the other hand, do not provide pure equity funds. These funds are designed to provide capital guarantees, which are difficult to provide if equity funds are invested.

Penalty

If you don't pay your NPS contributions, you can reactivate your account by paying a small fee. The annuity plan, on the other hand, may lapse if premiums are not paid on time or within the grace period. Only after paying all pending premiums during the revival term can policyholders reactivate, it.

Maturity

60% of the corpus can be withdrawn, with the remaining 40% converted to an annuity when the NPS achieves maturity.

Annuity plans, on the other hand, allow investors to withdraw only one-third of their capital, with the remainder requiring the purchase of a 66% annuity. 

Over to you

As you can see, both NPS and annuity plans have their sets of pros and cons. So, when planning for your retirement, choose an investment instrument that suits your unique needs.

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Frequently asked questions

1. What happens to a 40% annuity in NPS?

In NPS, you can withdraw up to 60% of the accumulated corpus as a lump sum at retirement, while the remaining 40% must be used to purchase an annuity. This annuity provides regular pension payments for the rest of your life.

2. Which is better, NPS or pension plan?

Choosing between NPs and a traditional pension plan depends on your financial goals and needs. NPS offers tax benefits, flexibility in investment choices, and a combination of lump-sum withdrawal and annuity. It is suitable for those seeking a long-term retirement savings plan with market-linked returns. Traditional pension plans often offer guaranteed returns and fixed monthly payouts but may lack the investment flexibility of NPS.

3. Is every annuity a pension?

Not every annuity is a pension. An annuity is a financial product that provides regular payments over a specified period, often used for retirement income. While many annuities are designed to serve as pensions, providing income for retirement, some annuities can be structured for other purposes, such as fixed-term payments or lump-sum distributions.