PFRDA Structures NPS Decumulation: New Retirement Income Schemes And Drawdown Options

The Pension Fund Regulatory and Development Authority (PFRDA) has officially introduced Retirement Income Schemes (RIS) and flexible Drawdown options under the National Pension System (NPS). So far, NPS has been focused on accumulation, but now, with a defined decumulation structure, it addresses the uncertainty linked to the critical withdrawal phase.

The primary objective of this major reform is to minimise the risk of early corpus exhaustion while optimising the periodic payout. Under the new guidelines, both the government and non-government subscribers can opt for the phased withdrawal of their lump sum corpus. It is different from an annuity, as the amount can be withdrawn either through deducting the units or at a payout rate which will be determined every year, based on age, market value of corpus, and frequency of withdrawal.

The circular clarifies that the amount available for drawdown will not interfere with the existing mandatory annuitisation requirements. It means that the existing 20per cent or 40  per cent annuitisation of the corpus will still be used mandatorily to purchase annuity for a lifetime.

RIS and drawdown facility will apply to the remaining amount that’s available for withdrawal in a lump sum. So, the decumulation structure provides an option to subscribers to bridge the gap between the fixed annuity income and their actual living expenses.

RIS Steady Scheme

The RIS Steady is a variant of a life cycle fund that is designed for the decumulation phase to provide a predictable cash flow to the subscriber while at the same time supporting a continued corpus growth. This variant will use a gliding path for asset allocation where equity exposure will be set at 35 per cent at the age of 60 years, and reduced to 10 per cent by the age of 75 years. From 75 years to 85 years of age, it will remain constant at 10 per cent. The remaining fund will be invested in corporate bonds and government securities as per the PFRDA-provided allocation structure.  

Two Drawdown Paths

Subscribers can choose from two distinct withdrawal methodologies:

Systematic Payout Rate (SPR):

SPR is the default option. Under this, payout will be determined based on the subscriber’s current age and the remaining drawdown period. For example, a 60-year-old person exiting from the NPS with the remaining 25 years of the drawdown period would have an initial payout rate of approximately 4 per cent, which would increase with every passing year as the person ages to ensure that the fund is fully utilised by the age of 85 years.

Notably, the payout rate will be reset annually on the subscriber’s birthday to reflect the prevailing market value of the corpus. This payout scheme will apply only till the age of 85; however, the annuity will be paid for the lifetime.  

Systematic Unit Redemption (SUR)

Under this option, an equal number of units will be redeemed over the selected drawdown period at the chosen frequency. The number of units to be liquidated will be fixed in the beginning.

For example, a person’s retirement corpus at the time of exit at age 60 (that’s the drawdown period) is Rs 50 lakh, and the NAV at the time of opting for SUR is Rs 10, so the total number of units will be 5,00,000.

If the person chooses the monthly payout frequency, the fixed withdrawal units will come out to be 1666.67 per month.

Formula:

Number of units per period = Total number of units at start / drawdown period x payout frequency

5,00,000 units ÷ 25 years x 12 months = 1666.67 units per month

The subscriber will also have the option to change their Pension Fund once every two financial years during the decumulation/drawdown phase. In case of the death of the subscriber during the drawdown phase, the balance in the NPS account will be paid to the nominees or legal heirs under the PFRDA (Exit and Withdrawals) Regulations, 2015.

Subscribers can choose from the monthly, quarterly, and annual payout frequencies. While the decumulation structure and the scheme have been announced, it will take effect only after the necessary operational infrastructure is in place, and PFRDA notifies these guidelines.

The withdrawal life cycle scheme offers flexibility; however, the regulator has mandated the Pension Funds, Central Record Keeping Agencies (CRAs), and other intermediaries to provide detailed Subscriber Disclosure. It clarifies that there is no guarantee or assurance regarding the periodic payouts, as they are subject to market risks.  

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