While retirement is an opportunity for newfound freedom, it comes with a new financial reality. After working hard during your lifetime to accumulate assets, it’s essential to be prepared and fully utilize these contributions. This is where the National Pension System (NPS) comes into the picture – a government-backed retirement scheme that is designed to provide you with steady monthly income in your post-retirement phase. One of the most common questions from future retirees is, “What is the monthly pension amount I will actually get from NPS?” So, let’s pose the question above in a straightforward and easy-to-understand manner.
What Exactly Is NPS?
Launched in 2004 by the Government of India, NPS was originally targeted at government employees. However, it has now been open to all Indian Citizens (including OCIs and PIOs) aged between New born to 70 Years.
You can open an NPS account starting at as little as ₹500 per contribution or ₹1,000 a year for a Tier-I account. The objective is simple: to create a retirement corpus through regular voluntary contributions and to then receive a monthly pension through an annuity.
Factors That Influence Your Monthly Pension
Unlike EPS, your NPS monthly pension isn’t fixed and will be affected by three factors:
- Your Monthly Contribution
There is no limit to your contribution to NPS. So, when you invest more every month during your work years, the more your retirement corpus will be and that will directly pay you out more later.
- Investment Options Under NPS
Thе NPS offers a rangе of invеstmеnt options, including еquitiеs, corporatе bonds, government sеcuritiеs and altеrnativе invеstmеnt funds. This divеrsity allows individuals to tailor thеir invеstmеnt strategy based on thеir risk tolеrancе and financial objеctivеs. Thе ability to choosе thе allocation of funds providеs an opportunity for highеr rеturns comparеd to traditional rеtirеmеnt savings options. Let us explore the investment options
Active Choice in the National Pension System (NPS) allows subscribers to control their asset allocation across different classes, with equity capped at Upto75%.
Allocation Limits:
- Equity (E) : Up to 75%
- Corporate (C) : Up to 100%
- Government (G) : Up to 100%
- Alternative Investment Funds (A) : Up to 5%
The Auto Choice option offers a life-cycle-based allocation, gradually shifting from higher equity in the early years to safer assets near retirement. Subscribers can select from three funds:
- Aggressive Life Cycle Fund – LC75
- Moderate Life Cycle Fund – LC50
- Conservative Life Cycle Fund – LC25
- Balanced Life Cycle Fund (BLC)
- The Annuity You Decide to Purchase
Once you turn 60, you must purchase an annuity from a registered provider with at least 40% of your NPS total corpus. This annuity is what actually pays you the monthly pension.
The higher the annuity purchase, the more you will receive as a monthly payout. For example, if you use 60% of your corpus instead of 40%, your pension will be proportionately higher.
Types of Annuity Plans in NPS
There are five different types of annuity plans that you can choose from, depending on your needs:
- Annuity for Life with Return of Purchase Price (ROP)
- Joint Life Annuity with ROP
- Family Income Plan with ROP
- Annuity for Life without ROP
- Joint Life Annuity without ROP
With the ROP option, your nominee will receive the original investment back after your death, which makes it a popular option. However, it usually pays a lower pension than an option without ROP.
What Kind of Monthly Pension Can You Expect?
Let’s take a simple example:
- If you invest ₹5,000 every month for 30 years (assuming a return of 10%), at the end of your investment horizon, you will have a corpus of more than ₹1.1 crore.
- Let’s assume you invest 40% of that corpus in an annuity (annuity rate of 6%). Your monthly pension could be in the range of ₹22,000 to ₹25,000 per month, depending on the type of annuity you select.
- Bear in mind that this is just an estimate; your actual pension will largely depend on (a) the market returns, (b) the annuity rate when you retire and (c) how much of your corpus you invest in the annuity.
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Conclusion
Rather than doing guesswork, you can use the NPS calculator that is available online. It can help you do a simulation of your contributions, returns and monthly pension estimates based on your age, length of investment and annuity selections. Trusted fund managers like UTI Pension Fund have a highly qualified & experienced team that’s known for their track record of delivering higher returns. Always do your research before choosing the right fund manager.
Unlike fixed pension plans, your NPS pension is determined based on the amount you contribute, returns on your investments during the accumulation phase and your annuity selection made at the end of the accumulation phase. NPS allows flexibility and potential for growth. That’s why it is considered one of the best retirement options available to working professionals today.