Annuity

Retirement

An annuity is a contract with an insurance company where you pay a lump sum and receive guaranteed regular income for life (or a fixed period). Compulsory at retirement for 40% of NPS corpus. Annuity rates in India are 5.5-7% annually -- providing predictable but potentially inflation-eroding income.

In detail

Annuity types available in India:nImmediate annuity: pay lump sum, income starts immediatelynDeferred annuity: pay now, income starts at a future datenLife annuity: paid until deathnJoint life annuity: paid until both spouses die (lower amount)nReturn of purchase price (ROP): full premium returned to nominee on death (lower annuity amount)nnNPS mandatory annuity: 40% of corpus must buy annuity at age 60. If corpus is below Rs 5L, can withdraw entire amount.nnInflation risk: a Rs 30,000/month annuity bought today will still be Rs 30,000/month in 20 years -- purchasing power severely eroded by 6% inflation.

Formula

Annuity amount = Corpus x Annuity rate / 12nAt 6% annuity rate: Rs 1 Cr corpus = Rs 50,000/month for lifenInflation adjusted: at 6% inflation, Rs 50,000/month now = equivalent Rs 15,640/month in 20 years

Real-life example

🇮🇳 India example

Arun retires at 60 with NPS corpus Rs 1.5 Cr. Mandatory 40% annuity = Rs 60L. At 6% annuity: Rs 30,000/month for life. Remaining Rs 90L tax-free: he invests in SCSS + FD for additional Rs 60,000/month. Total retirement income: Rs 90,000/month. The annuity portion provides the guaranteed floor; investments provide the growth hedge.

Frequently asked questions

Is annuity from NPS the best use of the 40% mandatory portion? ▼
No better alternative -- it is mandatory. But choose wisely: joint life with ROP (return of purchase price) variant protects spouse and returns corpus to heirs. Avoid pure life annuity (money dies with you). LIC, HDFC Life, SBI Life are reliable annuity providers. Compare annuity rates from multiple insurers before purchasing.