Taking the money out

Getting money out of the NPS is a process with forms, a split between a lump sum and an annuity, and tax rules that have changed within the last decade. This chapter describes the shape of the exit so you are not surprised by it. The numbers in force on the day you exit are the ones that apply, and they live in the current regulations, not here.

The ordinary exit at retirement

At the permitted retirement age, the usual structure has been that part of the accumulated balance may be taken as a lump sum and part must be used to buy an annuity that pays an income. The fractions, the minimum balance below which the annuity is not required, and the tax status of each piece have all been the subject of government decisions and can move again. Before you build a spreadsheet that spends the lump sum, read the current rule and the tax position of both pieces. An annuity is a purchase from an insurer. The rate you are offered depends on your age, the option you pick — a payment that ends when you die, or one that continues for a spouse — and the level of interest rates at the time. It is not a number the NPS promised you when you were thirty.

Why the annuity feels disappointing, and what it is doing

People compare the annuity rate with the return their equity class earned in a good decade and feel robbed. The comparison is between a market risk they are no longer supposed to be taking and a contractual income. The annuity’s job is to turn a pile of savings into a payment that does not depend on next year’s equity market. Shopping among the annuity providers the rules allow, and reading whether the payment rises, stays flat, or covers a spouse, is the work of that year. Taking the lump sum and then buying a random product the same week, because the annuity rate ‘felt low’, recreates the risk the structure was trying to shrink, at the exact age when rebuilding from a fall is hardest.

Leaving earlier

There is a process for exiting before the ordinary retirement age, and it has historically been stricter, often with a larger fraction locked into an annuity and a waiting period. Partial withdrawals while you stay in the system are a third door, open only for the reasons in the current circular, and only up to a fraction of your own contributions, not of the whole balance including gains. The existence of three doors does not mean any of them is open for ‘I saw a better investment’. If a better investment is the reason, the answer is that this account was the wrong home for money you intended to rotate.

A checklist for the year you intend to exit

1. Read the current exit regulation and the current tax treatment of the lump sum and the annuity. Note the date you read them.
2. Check the balance, the tier, and that contributions you think you made are actually credited.
3. Price annuities from the allowed insurers for the same option, including the spouse option if someone else depends on the income.
4. Decide what the lump sum is for, in writing, before it arrives. A lump sum without a job drifts into a single large purchase.
5. Do not move the asset mix into the riskiest class in the final year in an attempt to fatten the balance. That is how a retirement date meets a bad equity year.

What to remember

• The exit is a split between a lump sum and an annuity, on the fractions and tax rules then in force.
• Those fractions and rules have changed. Verify them in the year of the exit.
• An annuity rate is a market price for an income, not a disappointment relative to a past equity return.
• Early exit and partial withdrawal are narrower doors. They are not a trading facility.
• The last year’s asset mix should be quieter than the mix that built the account, not louder.