NPS exit rules explained: How the Retirement Income Scheme and drawdown options work

Over the years, the PFRDA has made changes to the National Pension Scheme (NPS) to make it flexible and subscriber-friendly. The PFRDA’s latest change is related to the subscriber’s exit and withdrawal options under the NPS. In this article, we will discuss the Retirement Income Scheme (RIS) and the drawdown options that it offers.

What is the RIS?

At the end of the accumulation phase, an NPS subscriber is allowed to withdraw up to 80% of the accumulated corpus as lumpsum. The Retirement Income Scheme (RIS) provides the NPS subscriber the flexibility to select a phased withdrawal of the accumulated corpus through one of the two drawdown options.

The objective is to optimise periodic payouts to subscribers during the decumulation (payout) phase through the drawdown options. The RIS aims to enhance cash flow predictability and corpus longevity through continued support to corpus appreciation. It minimises the risk of early corpus exhaustion before the drawdown period ends.

The drawdown options are available to the Government subscribers and other subscribers. The payout options include monthly, quarterly, or annual payouts till age 85 or as per the subscriber’s choice.

How does the RIS work?

The RIS corpus is managed through a life cycle scheme that makes periodic payments to NPS subscribers. Currently, under RIS, the RIS Steady variant is available. The RIS Steady scheme invests NPS subscribers’ money in 3 asset classes: Equity, corporate bonds, and Government securities.

At age 60 years, the subscriber will start with a 35% allocation to equity (E), a 10% allocation to corporate bonds (C), and a 55% allocation to Government securities(G). With every passing year, the equity allocation will reduce, and the corporate bonds and Government securities allocation will increase.

Under RIS Steady, the asset allocation for an NPS subscriber, based on age, will look as follows.

As shown in the above table, the equity allocation decreases by 2% each year till it reaches 15% at age 70. For the next 5 years, the equity allocation decreases by 1%, till it reaches 10%. Thereafter, the equity allocation stays constant at 10%.

The corporate bond allocation increases by 1% each year till it reaches 20% at age 70. For the next 5 years, it remains constant at 20% till age 75. Thereafter, it decreases by 1% each year till it reaches 15% at age 80 years.

The Government securities allocation increases by 1% every year till it reaches 75% at age 80.

Every year, on the subscriber’s birthday, the asset rebalancing of the drawdown corpus (based on prevailing market value) will be done, as per their age as mentioned in the above table.

Drawdown options

In the earlier section, we understood how the drawdown corpus will be invested and how the asset rebalancing will be done every year under RIS Steady. Now, let us understand the payout options and how they will work. The NPS subscriber can choose one of the following 2 options for payouts:

• Systematic Payout Rate (SPR)
• Systematic Unit Redemption (SUR)

Systematic Payout Rate (SPR)

The SPR will be the default option. Under the SPR, a specific percentage of the accumulated corpus will be paid out to the subscriber. The Systematic Payout Rate (SPR) is calculated based on the subscriber’s current age and drawdown end age. The systematic payouts for a given year are calculated using the SPR applicable to the subscriber’s current age on the market value of the drawdown corpus on the subscriber’s birth date.

Let us understand the SPR calculation with an example. Ajay exits the NPS at age 60. He opts for RIS Steady with drawdown payments through SPR till age 85. Every year, the SPR for Ajay will be as per the table below.

The systematic payouts will be reset on the subscriber’s birthday each year with the SPR reset. The subscriber can choose the payout frequency as monthly, quarterly, or annually.

Systematic Unit Redemption (SUR)

Under the Systematic Unit Redemption (SUR) payout option, an equal number of units will be redeemed, as per the payout frequency, over the selected drawdown period. For example, at the start of the decumulation phase, suppose the NPS subscriber holds 8,00,000 units with a net asset value (NAV) of Rs. 10 per unit, resulting in a Rs. 80 lakhs corpus. The subscriber has opted for a 25-year drawdown period with monthly payouts.

In this case, there will be 300 monthly payouts (25 years X 12 months) over the 25-year drawdown period. The units redeemed per month will be 2,666.67 (8 lakh units/300 payouts). The subscriber will receive a monthly payout of 2,666.67 units X NAV per unit.

The monthly payout amount will vary depending on the NAV per unit at the time of redemption of units. At the time of redemption, if the NAV per unit is higher than the previous month’s, the subscriber will receive a higher payout amount. Similarly, at the time of redemption, if the NAV per unit is lower than the previous month’s, the subscriber will receive a lower payout amount.

RIS is beneficial for NPS subscribers

The PFRDA’s latest initiative aims to provide NPS subscribers with more flexible periodic payouts during the decumulation phase while continuing to support corpus appreciation through the RIS. While the subscriber gets periodic payments, the remaining corpus stays invested and continues to grow. The RIS can pay the subscriber till age 85, which is a good timeline considering our current life expectancy of around 72 years. However, if an individual survives beyond 85 years, they will need to consider other income sources.