National Pension System (NPS) is one of the lowest cost retirement investment options currently available in India. As the name suggests, this investment provides pension, i.e. monthly payment to the subscriber after retirement. But there are some important differences between how the monthly pension amount is calculated in case of traditional pension plans like NPS vs Employees’ Pension Scheme (EPS).
In case of government pension schemes or EPS pension, the monthly pension amount is generally calculated using a fixed formula which is based on factors like salary received at the time of retirement, years of service etc. But this is not the case in NPS. The major factors that affect the monthly pension payment from NPS include the amount deposited in the NPS account, the annuity investment amount, the type of annuity chosen and the return on the annuity purchased.
In this blog, we will discuss the various factors affecting the monthly pension and calculate the monthly pension to be received from the National Pension System. However, if you want to read about the National Pension System in detail, you can refer to our blog NPS: Everything you need to know,
Factors Affecting NPS Pension Amount
Traditional pension schemes like government pension or EPS pension had a pre-determined contribution amount and a specific formula to calculate the monthly pension after retirement. The National Pension System is different as the amount deposited in the pension account varies from one subscriber to another due to a few key reasons:
You can choose the amount to be invested in your NPS account, subject to a minimum annual contribution of Rs 500. There is no maximum limit on the amount you can invest, therefore, you have the opportunity to deposit a larger amount. At the time of your retirement as compared to traditional pension plans where there is a maximum limit of pension contribution. As a result, your monthly pension from NPS can be much higher as compared to the monthly pension received from traditional pension plans.
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returns from nps investment
The returns from NPS will depend on the asset class in which you have invested. Under NPS, your contributions are invested in 4 different asset classes – equities, government securities, corporate bonds and alternative investment funds. In addition, you can also select the allocation limit for each asset class as per your risk tolerance and preference.
Hence, the returns from NPS are variable and depend on the mix of asset classes and the combined returns from different asset classes. Hence, returns from the scheme are not guaranteed. Hence, the final amount to be credited to your NPS account at the time of retirement will depend on the performance of the investments made, unlike traditional products where the returns are decided by the government. In our blog on Best NPS Fund Managers, we have provided details about various NPS asset classes and performance of pension funds.
Annuity and its Role in Monthly NPS Pension
Once you turn 60, you have to invest At least 40% of the accumulated NPS corpus To buy an annuity from which you get monthly pension. However, you can choose to use a larger portion of your NPS corpus to buy annuity to get a higher monthly pension. as well, There are exceptions with corpus up to Rs 5 lakh as they can withdraw the entire amount, You can use the ETMONEY NPS calculator to calculate how much you need to invest every month in your NPS account so as to maximize the amount available for annuity purchase.
So, let us understand what an annuity is, and how your NPS pension depends on it.
What is an Annuity?
Annuities are financial products offered by insurance companies. Annuity purchase involves an initial lump sum investment that can provide you/your family members a fixed monthly income for a specified period of time. The person/s who are eligible to receive annuity payments are known as annuitants.
The return you get from your annuity investments will vary depending on the type of annuity chosen and the annuity provider. Once you buy any type of annuity under NPS, the rate of return is locked and does not change during the period you receive your pension.
Types of Annuity offered under NPS
At present, 5 different types of annuities are provided under the National Pension System. these:
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Annuity for Life (ROP) with return of purchase price
In this type of annuity plan, the NPS subscriber gets a monthly pension during his lifetime. On the death of the subscriber, the monthly pension payment stops, and the entire purchase price for the annuity is paid as a lump sum to the nominee.
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Joint Life Annuity with ROP
In this type of annuity, the subscriber receives monthly pension payments during his lifetime. On the death of the NPS subscriber, the spouse receives pension benefits during their lifetime. After the death of the spouse, the monthly payments stop. Then, the annuity purchase price is paid to the designated nominee by the NPS account holder.
NPS subscribers opting for this annuity option receive monthly pension during their lifetime. After the death of the subscriber, the spouse will get the pension for their lifetime. After the death of the spouse, the dependent mother, then the dependent father of the NPS subscriber, can receive monthly NPS pension. If none of the eligible annuitants is alive, the monthly payment stops. Then, the entire annuity purchase price is paid to the children or legal heirs of the NPS subscriber.
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Annuity for life without ROP
Customers opting for lifetime annuity without return of purchase price (ROP) option will receive monthly pension during their lifetime. After the death of the subscriber, the monthly payment stops. Since the original annuity purchase amount is not refunded, annuity providers usually offer higher returns than annuity options with ROP in this case.
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Joint Life Annuity Without ROP
Subscribers opting for this NPS annuity option will get monthly pension during their lifetime. After the death of the subscriber, the monthly pension payments will continue during the lifetime of the subscriber’s spouse. After the death of a spouse, monthly pension payments stop, and the original purchase price is not refunded. In this case the monthly NPS pension is higher as compared to the pension payable under annuity along with ROP.
Annuity Provider and Annuity Return under National Pension System
The current rules of the National Pension System allow you to buy an annuity from any authorized annuity provider. The table below shows some of the major authorized annuity providers and the rates of return that these insurers offer for different types of annuities:
| annuity provider | Annuity for Life (with ROP) | Family Income (with ROP) | Annuity for life (without ROP) |
| Bajaj Allianz Life Insurance Company | 6.31% | 6.31% | 8.10% |
| Canara HSBC Oriental Bank Of Commerce Life Insurance | 5.92% | 5.92% | 8.07% |
| Edelweiss Tokyo Life Insurance | 5.79% | 5.79% | 7.80% |
| HDFC Life Insurance | 6.22% | 5.64% | 8.28% |
| India First Life Insurance | 6.12% | 6.12% | 8.00% |
| LIC of India | 5.34% | n/a | 8.00% |
| Max Life Insurance | 6.28% | n/a | 8.18% |
| PNB MetLife India Insurance | 6.08% | 6.08% | 8.53% |
| SBI Life Insurance | 6.05% | 6.05% | 8.16% |
| Star Union Dai-ichi Life Insurance | 5.87% | n/a | 8.32% |
| Tata AIA Insurance | 6.62% | n/a | 7.75% |
The above annuity rates are applicable till November 30, 2021. Annuity rates are not fixed and change from time to time depending on external factors like interest rates scenario etc.
Monthly Pension Payment Calculation for National Pension System
As mentioned earlier, the monthly NPS pension depends on two major factors apart from the amount deposited in your NPS account. These factors are – choice of annuity provider and type of annuity plan.
Presently, the highest returns are available for NPS subscribers to choose annuity plans without return of purchase price (ROP). Here, as you will not get your corpus back, companies provide you higher returns and you will get higher monthly NPS pension. Hence, at present, NPS customers opting for lifetime annuity without ROP from PNB MetLife India Insurance can get returns of up to 8.53% per annum.
On the other hand, the lowest annual return is currently paid to NPS subscribers who opt for the annuity option featuring return of purchase price option. Currently, the minimum annual return you can get from this type of annuity is 5.34% per annum which is provided by Life Insurance Corporation of India (LIC).
To understand how the annuity rate and type of annuity that you get from NPS affects your monthly pension, let us consider an example. Suppose, you decide to buy an annuity of Rs 50 lakh from one of the annuity providers who are currently linked to the National Pension System. The table below shows the monthly pension that you will receive from NPS for different annuity returns of 5.34% p.a., 6.31% p.a. and 8.53% p.a.:
| Calculation of Monthly NPS Pension Payment | |||
| NPS Annuity Purchase Price | ₹ 50 lakh | ₹ 50 lakh | ₹ 50 lakh |
| annuity option | Annuity for life with ROP | ROP. family income with | Family income without ROP |
| annuity provider | LIC of India | Bajaj Alliance Life Insurance | PNB MetLife India Insurance |
| Average Annual Annuity Return | 5.34% | 6.31% | 8.53% |
| Monthly Pension from NPS Annuity | ₹22,231 | ₹25,411 | ₹35,559 |
As you can see, if you choose Family Income Without ROP Annuity option from PNB MetLife India then you can get a monthly pension of Rs 35,559. Whereas your monthly pension from NPS will be much less Rs 22,231 if you choose LIC Annuity for life with ROP option. However, in case of LIC annuity, your kin will get back the initial annuity purchase price of Rs 50 lakh after all eligible annuitants die.
ground level
Among the various factors that affect the monthly pension amount from NPS, the rate of return from NPS and the annuity return are two major things that an investor cannot control. This is because these factors depend on many variables such as the performance of the individual asset classes chosen, market interest rates, etc. But what NPS subscribers can control is the amount they can save in their NPS account and the higher contribution will result in a higher corpus on retirement. So, if you maximize your NPS investment, the lump sum you can invest in the annuity will be bigger and you can get a higher monthly pension.
Hence, you should focus on maximizing the investment in this tax-saving instrument so that you can get the dual benefit of tax savings while earning and get a monthly pension after retirement.
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