Sound financial planning can ensure a steady flow of income in post-retirement years. There are multiple avenues available in the market that can help in generating wealth for a successful retired life such as National Pension System (NPS) and annuity plans.
While NPS is a pension scheme in which a government employee contributes towards pension from monthly salary along with matching contribution from the employer, annuity plans helps investors in getting a regular payment for life after making a lump sum investment.
Under annuity scheme, the life insurance company invests the money of the investor and pays back the returns generated from it. Some investors may prefer investing in annuities as it allows piling a larger amount of cash.
However, experts believe that NPS scores over annuity plans because of low costs and choice of investment funds in the current format.
Naval Goel, CEO and founder of PolicyX says, “NPS is better for retirement purposes owing to the minimum contribution and partial withdrawal benefits.
In view of this, let’s see how NPS compares against annuity plans:
The minimum amount to be contributed in NPS is Rs 6,000 annually. While it is between Rs 18,000 and Rs 24,000 in case of annuity plans, according to PolicyX.
In NPS, up to 75 percent of investments can be done in equity. This means, investors can earn long term capital gains. On the other hand, annuity plans do not offer pure equity funds. These funds are supposed to give capital guarantee which is difficult to fulfill in case equity funds are offered, according to PolicyX.
In case of non-payment in NPS, the option of re-activation is available by paying a nominal penalty. While, the annuity plan may lapse if the premiums are not paid on the due date or within the grace period. Policyholders can revive it only after paying all pending premiums within the revival period.
Withdrawal option of 60 percent of the corpus is available and 40 percent is to be converted to an annuity after NPS reaches maturity.
Annuity plans, on the other hand, allows investors to withdraw only one third of corpus and for balance, 66 percent annuity is required to be bought.
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