What​‍​‌‍​‍‌​‍​‌‍​‍‌ is Annuity Rate in NPS? A Quick Guide

The annuity rate in NPS is essentially a number that shows the money you will receive annually in exchange for your retirement corpus. It is a big factor in determining the monthly pension amount post-retirement. Having knowledge of this would definitely make your money work better for you when you are not working.

What Does the Annuity Rate Mean?

It is assumed that you will have accumulated a sizeable amount in the National Pension Scheme (NPS) by the time you retire. To buy a pension from companies that offer such services, you are required to use 40% of that amount at the very least. An annuity rate is a percentage which indicates the yearly income one can expect from the money invested. The highest rate that is possible will give you the highest pension every month.

What Affects Your Annuity Rate?

Here is the truth: Many factors will determine your Annuitants rate. Among these factors are few ones that will help you in deciding the most affordable plan.

Firstly, it is the type of annuity (dependence on the spouse, survival for others or money return option) you select

Your age at the time of retirement (usually, old people are given better rates)

How much will you put in the annuity?

What are the present interest rates in the market?

The company issuing the pension contract

How to Calculate Your Monthly Pension? Here's an Illustration

Imagine the situation when the amount you have saved with the NPS reaches ₹1 crore by the time you retire. You made an investment of 40% of your savings- ₹40 lakh in an annuity plan. The annuity rate is 6%, so that means 6% of ₹40 lakh will be paid to you yearly, which is ₹2,40,000.

Divide this amount by 12 and you get ₹20,000 as the amount of money you will be receiving each month. Thus, the pension with that annuity will be ₹20,000 per month for life. Quite easy, isn’t it?

Common Types of Annuities and Their Usual Rates

Let me just rattle off a few examples of the kinds of annuities that are most commonly used, and the rates that you can expect to get:

Life annuity: 6.5% to 7%

Joint-life annuity: 5.5% to 6.5%

Annuity with return of purchase price: 5% to 6%

Fixed-period annuity: 6% to 6.8%

Brief Summary

Knowing what an annuity rate is can help you a lot when you start thinking about life after work. It is the one that makes real the dream of having money come to your hand every month. Your better understanding can also bring about better decisions. If you find a good plan, then, you will still get money after those days without work. It all boils down to the fact that good preparation will work out in the end!