Kolkata: NPS, or the National Pension System has been designed exclusively for the post-retirement requirements of an individual and his/her family. But how much to retain of the funds for annuities and how much to take out as a one-time payment? This remains a tricky question for subscribers. Recently the authorities have made the exit rules of NPS smoother, thereby raising the flexibility of annuity purchases. With this flexibility, the onus has increased for contributors who must decided prudently on how to allocate money to annuities since it needs the art of balancing between essential expenses and market returns that one can earn. Annuities offer steady income which is akin to pension. Personal finance experts say that one should always choose annuities so that they cover all the essential expenses. The mandatory contribution to annuity was 40% earlier. It has been halved to 20%. The mandatory contribution to annuity was viewed as an impediment to many people.
Why is choosing annuities important
Annuities provide regular cash flow every month exactly like pensions. This is alone to underscore the significance of annuities. If any subscriber chooses the inappropriate annuity plan, he/she will keep getting an income which is not right for his/her requirements. Requirements vary from family to family and so annuity choices should be different too. The rates of annuity payment differs from insurance company to insurance company. By the way, life insurance companies pay annuties. “The annuity should ideally be aligned with essential monthly expenses to ensure a stable inflow irrespective of market conditions,” Sriram Iyer, MD and CEO, HDFC Pension has been quoted as saying in media reports.
Choose the right option
The first step to choose the right annuity is to calculate how much cash flow do you need every month. If an individual needs a higher cash flow every month, basic life annuities could make more sense since these usually pay the most regularly. But the payout stops after the subscriber dies. But if one wants less cash per month and wants to conserve money for the surviving family members, then joint-life options are appropriate since the money keeps flowing even after one individual expires. However, in both cases, annuities can be structured so that the money left in the corpus is paid to the nominees after the death of both spouses.
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