Summary of this article
Extended exit age and lower annuitisation improve flexibility but demand disciplined asset allocation and rebalancing.
Higher lump-sum withdrawals should be used selectively, not as a default, to avoid longevity risk.
NPS now works best as part of a broader retirement portfolio, alongside mutual funds and other assets.
Flexibility increases responsibility—sustainable, inflation-adjusted income should remain the core goal.
The National Pension System (NPS) has been reshaped recently with a series of sweeping reforms that significantly alter how Indians can build, access, and manage their retirement savings. The changes mark a decisive shift from a rigid pension framework to a more flexible, market-linked retirement solution.
Financial experts, however, warn that while the new rules empower investors, they also demand sharper planning, disciplined withdrawal strategies, and a clear understanding of longevity and inflation risks.
1. Exit Age Extended To 85
The new norms allow both government and private subscribers to stay invested in NPS up to 85 years of age, offering added flexibility to continue investing for a longer period.
Thus, for those who don't need the money at age 60, another 25 years of market-linked growth can exponentially increase the capital. The move also aligns with rising life expectancy by enabling retirees to store their money in a low-cost, regulated fund, thereby benefiting from the potential for compounding.
Atish Jain, CEO, Choice Connect, says, “This change reflects rising life expectancy and evolving work patterns. Many individuals continue earning well into their seventies and may not need to draw down retirement savings immediately. Staying invested longer allows continued compounding and enables a more phased and flexible approach to retirement.”
However, a longer investment horizon also means extended exposure to market risk. Without timely rebalancing, late-stage market volatility can impact retirement stability and reduce the margin for recovery.
“Staying in NPS (especially if equity-heavy) at an advanced age carries the risk of a market crash just before you need to withdraw. Moreover, managing investment choices and withdrawal requests may become harder as one advances in age,” says Kurian Jose, CEO, Tata Pension Management.
What Should You do?
If you have sufficient other funds, defer your exit and let the NPS corpus grow. However, “you may like to reduce your equity exposure and increase your asset allocation toward Government Securities (Asset Class G) as you age to protect the capital,” advises Jose.
Staying invested longer should not mean staying aggressive. Asset allocation must gradually become more conservative with age. “Discipline in rebalancing becomes increasingly important as investors approach and move through retirement,” says Jain.
2. Higher Lump-Sum Withdrawal
Non-government NPS subscribers are now permitted to withdraw up to 80 per cent of their retirement corpus as a lump sum at the age of 60, up from the earlier limit of 60 per cent, subject to eligibility conditions such as completing at least 15 years of contributions or having adequate pension provisioning. The remaining 20 per cent of the corpus must be utilised to purchase an annuity, ensuring a steady stream of pension income.
According to industry experts, the biggest positive is flexibility. Retirement today is no longer a fixed event where income suddenly stops. Many retirees continue earning through consulting, freelancing, or business income, while also facing real needs such as loan closures, medical expenses, or family commitments. Allowing access to a larger portion of the corpus makes NPS more aligned with how retirement actually plays out, rather than assuming a single retirement date followed by complete income dependence.
“This change also improves the relevance of NPS for private-sector and corporate subscribers, for whom income patterns and retirement timelines are often less predictable than in traditional government employment. Greater flexibility can increase engagement with NPS as a long-term retirement vehicle rather than a rigid pension product,” informs Jain.
The key risk is behavioural. A large lump sum can create a sense of comfort early in retirement, while the retirement phase itself may last two to three decades. The concern is not liquidity, but longevity - the risk of spending too much, too soon, without a structured income plan in place.
In India, retirement expenses are often uneven. Medical costs, family support, or dependent parents can put sudden pressure on finances much earlier than expected. Without careful planning, higher lump-sum access can lead to suboptimal outcomes later in life, especially when rising healthcare costs and inflation begin to compound.
What Should You Do?
The 80 per cent limit should be seen as an option, not a default. Just because a higher withdrawal is permitted does not mean it should be fully utilised. “The decision should be based on the investor’s broader financial position, including post-retirement income sources, expected expenses, and the ability to manage capital across a long retirement horizon,” suggests Jain.
A phased withdrawal strategy often works better than a one-time lump sum for most retirees and helps balance flexibility with long-term income stability.
3. Reduction In Compulsory Annuitisation
The compulsory purchase of an annuity has been halved from 40 per cent to 20 per cent.
Industry experts say annuity returns have been a concern for many years, particularly in a low-interest-rate environment. Reducing compulsory annuitisation gives retirees greater control over capital and allows them to structure retirement income in a way that fits better with their broader financial situation.
It also helps NPS integrate more naturally with other retirement assets such as mutual funds, real estate, or other long-term investments, rather than operating as a standalone pension product.
“Annuities, however, provide certainty of income, which becomes increasingly valuable with age. Lower compulsory annuitisation increases the risk that retirees may not have a guaranteed income stream if the remaining corpus is not managed with discipline and clarity. Many retirees underestimate how reassuring a guaranteed monthly income feels once regular salaries stop, particularly in later years when risk tolerance declines,” says Jain.
Who Should Stick To The 40 Per Cent Annuitisation Limit?
Investors who value predictability, have limited alternative income sources, or prefer assured monthly income should continue with higher annuitisation, even though it is no longer mandatory.
Who Should Go For The 20 Per Cent Annuitisation Limit?
Those with diversified assets, financial awareness, and a clearly defined withdrawal strategy can consider the lower annuitisation requirement, provided they are comfortable managing longevity risk and market volatility.
4. 5-Year Lock-In Period Scrapped For Non-Government Subscribers
This relaxation primarily helps in making NPS more liquid, which would help subscribers in accessing their funds in genuine emergencies without waiting for the previously-mandated 5- year period.
However, now exits before 15 years or age 60 are treated as premature exits, which mandates that at least 80 per cent of the corpus be locked into an annuity, leaving only 20 per cent as a lump sum.
Hence, “investors should avoid exercising this option unless facing a dire financial crisis as the high compulsory annuitisation significantly restricts access to the principal amount and derails long-term wealth creation,” says Abhishek Kumar, Founder of SahajMoney.
Key Takeaways For Investors
These reforms make NPS more flexible and more relevant, which is a positive development. However, flexibility also increases responsibility.
With these changes, investors should view the NPS as a flexible long-term wealth accumulation tool that now competes with mutual funds. But they should invest only if they have at least a 15-year investment horizon.
“After 15 years of contribution once 80 per cent of the fund amount is available for lump sum withdrawal, then one is advised based on their risk appetite to invest it in a mix of debt and equity investment or manage regular withdrawal through SUR (systematic unit redemption), rather than locking money in low yield annuities beyond the mandatory 20 per cent,” advises Kumar.
Furthermore, extending the investment age to 85 is a powerful feature for estate planning and tax deferral. So, investors who do not need the funds immediately should continue their accounts to let the power of compounding work longer and then utilise the SUR facility later to create a tax-efficient income stream in their advanced years.
“Retirement planning often looks straightforward on paper, but behaviour and emotions play a much bigger role in real-life outcomes. Investors should focus less on maximising withdrawals or minimising annuitisation and more on building a sustainable, inflation-adjusted income stream for a long retirement,” suggests Jain.
