To make the National Pension System (NPS) more
attractive, the government could do away with a norm mandating retiring
employees to buy an annuity with 40 per cent of their accumulated corpus.
Returns on annuity products that deliver a monthly income
to retirees are quite low and the compulsory annuitisation puts off
potential investors who may prefer to park their retirement savings
elsewhere for better returns.
For premature withdrawals from the NPS before the age of
60, eighty per cent of the amount must be invested in an annuity product.
At retirement, 40 per cent of savings must be invested in
an annuity, although the PFRDA has allowed retirees to defer the purchase
for three years, if the financial markets are in a downturn when they turn
The intent is to ensure people get a monthly income in
their sunset years instead of frittering away their entire nest-egg on large
expenses at retirement.
Scrapping the annuity requirement altogether would need a
change in the PFRDA Act which stipulates an annuity purchase at retirement,
but it is possible to reduce the proportion of corpus to be annuitised from
the 40 per cent prescribed now.
So the PFRDA has proposed a reduction in the mandatory
annuity norm, giving people the option to invest in other products that
could offer higher returns, Mr. Contractor said. The Finance Ministry is
considering the proposal.
Diluting the annuity prescription would spur greater
competition between the 12-year old NPS, which is managing Rs.1.45 lakh
crore savings for 3.8 million members, and the EPFO which has Rs.10 lakh
crore under its watch.
It may be recalled that the Centre had to backtrack on a
Budget proposal this year, intended to bring parity between the two
retirement savings alternatives by making 60 per cent of EPF corpus taxable,
after widespread furore and an intervention at the highest level.
While he had rolled back the tax on EPF savings, Finance
Minister Arun Jaitley made 40 per cent of the NPS corpus tax-free in this
Budget. Earlier, the entire NPS corpus was taxable.
Govt had granted an additional annual deduction of
Rs.50,000 from gross taxable income for NPS investments over and above the
Rs.1.5 lakh deduction permitted for similar investments such as life
insurance premia, public provident fund and EPF.
The PFRDA chief said the additional deduction triggered a
surge in new NPS accounts, most of which were opened towards the end of the
previous financial year.