NPS Introduces Retirement Income Scheme (RIS) for Systematic Payouts
The National Pension System (NPS) landscape has seen a relentless series of reforms in recent months. After major changes to exit and investment norms last year, the latest reform targets the withdrawal phase.
Until recently, NPS subscribers retiring at 60 had limited choices for their corpus. While at least 20% of the corpus had to be compulsorily used to purchase an annuity, the remaining 80% could either be withdrawn as a lump sum or accessed gradually through the existing Systematic Lump-sum Withdrawal (SLW) facility, where subscribers decided the amount and timing of withdrawals. Now, the Pension Fund Regulatory and Development Authority (PFRDA) has introduced a third option for this 80% portion: the Retirement Income Scheme (RIS), a structured withdrawal plan with built-in guardrails aimed at helping retirees make their corpus last longer.
Phased withdrawal to optimise corpus
Under the ‘RIS Steady’ variant, the scheme offers orderly exit and regular— monthly, quarterly or annual —payouts through two drawdown options: systematic unit redemption (SUR) and systematic payout rate (SPR), with the latter being the default option. More on how SUR and SPR differ later.
According to the PFRDA, the purpose is to improve cash flow predictability and corpus longevity, thus minimising the risk of the accumulated funds being exhausted before the end of the drawdown period. The systematic payouts will begin once the accumulation phase ends and continue until age 85.
Currently, the only available variant, RIS Steady provides a predefined withdrawal runway in which equity exposure shrinks in line with subscribers’ advancing age.
Under RIS Steady, the asset mix is pre-set by age and shifts automatically (see table). At 60, the equity allocation starts at 35% and steps down every year—33% at 61, 25% at 65, 15% at 70, 10% after 75. Government securities, the most conservative asset class, makes the mirror-image move, rising from 55% at 60 to 75% after 80.
The annual payout amount under SPR will reset on the subscriber’s birth date, as will asset rebalancing (based on the prevailing market value of the drawdown corpus) in accordance with the subscriber’s age bracket.
Subscribers can choose to be invested with their pension fund manager selected during the accumulation phase, with a selection switch being allowed once every two years.
You can withdraw the entire residual corpus, if any, under SPR as a lump sum once the drawdown period is over. In the event of the subscriber’s death while the systematic withdrawal is in effect, the lump-sum, minus scheduled payouts, will be handed over to the beneficiaries.
Why RIS?
Experts say RIS provides retirees with greater flexibility, more stable income, and better management of their retirement savings. “It enables the retirees to systematically withdraw pension wealth while allowing the remaining corpus to stay invested. This helps retirees potentially benefit from continued market participation, manage longevity risk more effectively and create a more customised retirement income stream aligned with their financial needs and life expectancy,” says Vishwajeet Goel, Head, PensionBazaar.
As with the auto choice via age-wise life-cycle funds during the accumulation— investment—phase, RIS ensures that retirees need not be concerned about actively managing their lump-sum component. Without a structured plan, many might simply park their corpus in FDs or savings accounts—safe, but inadequate against rising costs and longer lives.
“With life expectancy rising, career spans shortening, and living expenses shooting up, it is becoming extremely difficult to manage living expenses for long retirement phases. The regulator wants retirees to create a structured income stream and avoid exhausting retirement savings too early,” says financial adviser Anuj Kesarwani, Founder, Zenith Finserve.
RIS provides flexibility to retirees by allowing the remaining corpus to stay invested in market-linked NPS funds such as equity, corporate debt and government bonds, while enabling staggered withdrawals. “This gives the money a chance to grow further during retirement,” says Rajesh Khandagale, SVP – NPS, KFin Technologies.
The RIS asset allocation pathway
Systematic lump-sum withdrawal vs RIS
But why RIS when systematic lump-sum withdrawal, where subscribers can make regular withdrawals from this component of their corpus, already exists? “SLW is a way to withdraw money, while RIS is a thoroughly designed scheme with data-backed calculations, which will make sure that the retirement corpus lasts for long. RIS will manage pension payouts while making sure that the corpus can take care of the longevity risk,” says Sumit Shukla, MD and CEO, Axis Pension.
In systematic lump-sum withdrawal, retirees decide the amount and frequency of withdrawals. “It is relatively flexible and straightforward. However, the responsibility of ensuring that the money lasts throughout retirement largely remains with the retiree. RIS attempts to behave more like a retirement income solution that balances withdrawals, longevity and continued investment growth together,” says Kesarwani.
RIS’ objective is to strike a balance between excess withdrawals, over-conservatism and to inculcate discipline instead. “Many retirees struggle to find the right balance after retirement. Some withdraw money too aggressively in the early years and later worry about running out of savings. Others become too conservative, fail to use their retirement corpus properly, and compromise their lifestyle unnecessarily. One of the biggest advantages of RIS over the existing SLW option is that it may help bring better discipline to retirement withdrawals,” he adds.
Shukla of Axis Pension believes that RIS is the best package for subscribers who do not need the lump- sum in one go. “RIS gives them returns, which makes the corpus grow, plus they can withdraw a pension from it,” he says.
SUR or SPR: Take your pick
Once you opt for RIS, you can select either SUR (systematic unit redemption) or SPR (systematic payout rate, which is the default plan) as drawdown options. “In SUR, the number of units withdrawn remains fixed, but the monthly income fluctuates because net asset value (NAV) changes with market performance,” says Goel. So, rising markets can increase payout value, falling markets can reduce it, and residual corpus can also vary significantly over time.
SUR entails redeeming fixed number of units, like mutual funds, while the payout rate remains fixed in the case of SPR. “Under SPR, retirees receive periodic payouts from their retirement corpus based on a predefined age-linked payout rate prescribed by PFRDA (see above graphic). The SPR is fixed for 12 months at a time and is recalculated each year on the subscriber’s birthday, based on the remaining drawdown period through age 85. As the retiree ages, the payout rate gradually increases,” says Goel.
The periodic payout is calculated on the market value of the remaining retirement corpus at the annual reset date (the subscriber’s birth date). “Since the corpus continues to remain invested during the drawdown phase, payouts remain market linked and may rise or fall depending on investment performance,” he adds.
Age-wise systematic payout rate
How SUR payouts will work
SUR = systematic unit redemption
* The actual rupee payout will depend on the NAV prevailing at the time of redemption each month.
^ In SUR, the number of units withdrawn remains fixed, but the monthly income fluctuates as NAV changes as per the market performance.
Source: PensionBazaar
Payouts under SPR option
Assumptions and notes: 1. In line with the Retirement Income Scheme’s pre-defined asset allocation across age brackets, the
corpus grows fastest in the initial years due to higher equity exposure (starting at 35% and declining over time). As the allocation
gradually shifts towards debt (corporate bonds and G-secs), returns moderate in later years (equity exposure is minimal
at 10% towards the end of the drawdown period). 2. The corpus is exhausted at the end of the drawdown period 3. Returns
assumed to be 10% from age 61–64, 9.5% from 65–69 years and so on. 4. Actual payouts may vary depending on market performance
and corpus value. 4. Payouts are made at the end of each year. Source: ET Wealth Research, PensionBazaar
Ascertain the advantages, limitations and suitability
Financially-savvy investors will benefit from additional choices, market-linked returns and flexibility, but do multiple options also run the risk of complicating a scheme, that was meant to be a simple instrument aimed at lay retirees? “It may make retirement decisions more complex for first-time or conservative investors,” points out Goel. Therefore, subscribers with limited knowledge of instruments and market volatility need to gain a complete understanding of how RIS works and be confident in their ability to stomach interim market fluctuations.
The tax treatment of these systematic payouts—as well as the 20% lump sum (over and above the 60%, which is tax-free)—is ambiguous. “There is no clarification from PFRDA yet on the tax applicability of staggered payouts, and subscribers should seek advice from chartered accountants or tax consultants,” adds Khandagale of Kfin.
While PFRDA’s plethora of reforms are aimed at making the product more retireefriendly, some might find the multitude of options overwhelming.
“For many people, NPS itself already feels difficult to fully understand because it involves multiple asset classes, annuity decisions, taxation rules and withdrawal structures. RIS adds another layer to this process through structured payout mechanisms and retirement income options,” adds Kesarwani.
Risk-averse investors should note that the returns are market-linked, which will affect payouts. These are not guaranteed or secure, unlike, say, annuity or even fixed deposits. “RIS is likely to be more relevant for investors who are comfortable with market fluctuations and prefer keeping their corpus invested in equities and bonds for potentially higher, inflationbeating returns. Others (risk averse subscribers) may prefer guaranteed income options,” says Khandagale. On the other hand, those willing to take higher risks, might find maximum equity exposure of 35% inadequate.
Your choice will boil down to your risk appetite, objective—inflationbeating returns vs simple, guaranteed payouts—and other sources of retirement income. “If there’s rent or spouse’s pension that already covers your basic expenses, then locking a big slice into a low annuity or assured return instruments makes little sense,” says Anooj Mehta, Partner, 1 Finance.
While the product is designed to cover longevity risk, the drawdown period ends at age 85. “Once a subscriber enters the RIS drawdown phase under SPR or SUR, fresh NPS contributions cannot be resumed. The framework is also designed to exhaust the corpus by age 85, which means retirees may need alternate income arrangements for longevity beyond that age,” adds Goel.
