After announcing SIP in NPS , PFRDA has also allowed SWP in NPS. If you are a mutual fund investor you must be knowing this terminology. These SIP and SWP features only have made mutual funds popular among Retail investors. Nowadays even insurance companies, PMSes and even stock brokers use SIP and SWP features to popularize and promote their products.
This article is to discuss the new feature of Systematic Lump Sum withdrawal, introduced by PFRDA on the Pension corpus of NPS. For SIP in NPS, you may refer to my old article.
This has been a long pending demand by National Pension Scheme investors where they are concerned on how to use the maturity corpus in the product. Earlier in the defined benefit scheme, they need not to think this much, but with the lumpsum money in hand they are expected to make mistakes and get into non suitable products.
And even though the money they withdraw would be tax free in NPS, the other income generating products they might go with would be taxable.
To answer this issue, PFRDA has announced SLW (Systematic lump sum Withdrawal) facility in NPS which works similar to SWP (Systematic withdrawal Plan) in Mutual funds.
Lets try to understand this newly added feature in detail.
What is SWP in NPS – Systematic lumpsum Withdrawal (SLW)
NPS is not a new product to the investors. It is mandatory in case of government employees, but optional in “All citizens Model”. Still , every Citizen , even NRIs, can invest in NPS. You may get to know about how NPS works through this article.
Now the Purpose of NPS is to make people save and invest towards their Retirement.
So, you invest in the account on Monthly, Annual basis in the Asset Allocation of your choice, or make it automatic, and later on maturity which would be at 60 years of your age, you are eligible to make withdrawal from the corpus. (Read: Active or Auto Allocation in NPS)
As per the withdrawal rules in All citizens Model of NPS, the subscriber may defer the lump sum withdrawal till 70 years of age. But if he has opened an account post 60 years then he may defer till 75 years.
Now with the announcement of the Systematic Lump Sum Withdrawal feature, if one does not need the total proceeds in lump sum but want to supplement the regular monthly income and that too “tax free” then this is possible in NPS.
With SLW facility, on exit, on account of Superannuation, lump sum corpus can be withdrawn in a phased manner. Subscriber has an option to withdraw desired amount systematically at regular periodic intervals. This is similar to the Systematic Withdrawal Plan under Mutual Funds.
Now the Interesting point here is, that even though the SWP in Mutual funds provides tax efficient income due to the mix of capital gains and capital withdrawal, the SLW in NPS will provide completely tax free withdrawal , as you will be taking money from the Tax free portion of NPS corpus.
Thus going forward, it would be interesting to plan the Regular retirement Income with a mix of Interest income and Pension (Taxable), SWP in MF(Tax efficient) and SLW in NPS (Tax Free). (Also Read: Bucketing strategy in Retirement)
To know the process to activate this feature in your NPS account, Click here.
Conclusion:
Retirement Planning is The Most Important aspect of Financial Planning. Government knows this very well. Supporting the aging population from government resources will not be feasible for any government. This is the reason NPS got its genesis.
There were many features which did not let this retirement product get traction among the masses, and two of them were long lock-in and second the taxation of maturity proceeds.
The allowing of partial withdrawal for important needs and also allowing withdrawal of 60% of corpus and that too tax free made the product attractive.
Still, the removal of tax advantage( u/s 80CCD) in the new tax regime has not gone well with the depositors. As it does not give Instant gratification to the Investors. Read more: Deduction under Section 80C – All qualifying Investments and Expenses
Plus there are some operational issues in rebalancing and making contributions.
Still, slowly NPS is becoming a “cannot be ignored” investment instrument.
And now with the coming up of the features of SIP in NPS and SWP in NPS, PFRDA is giving the necessary push to make this product attractive among Investors.
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But one problem remains.If you opt for SWP, you cannot then contribute further to your NPS ac.
Ideally, it should allow SIPs or lumpsum investments on one side and SWPs on the other, just as MFs do.
You can then enjoy the advantage of incremental investment into NPS earning a decent return while you withdraw a part of the corpus.
It is requested to kindly elaborate on :
1. whether 100% of the credit balance can be systematically withdrawn over a period. How much is the minimum period of withdrawal.
2. Whether SWP will stop once the credit balance in NPS becomes zero.
3. Tax treatment and its calculation is not clear.
You are requested to kindly take an example on an excel sheet and take life span of 75/80/85/90 years and elaborate on the SWP and its tax treatment.
Thank you.