National Pension System (NPS) provides Systematic Lump-sum Withdrawal (SLW) to its subscribers. In this blog-post, we will see what this SLW facility is, and is it beneficial for retirees to withdraw from NPS through SLW.
What is this SLW facility?
As we all know, when an NPS subscriber achieves retirement or the age of 60, they can take 60% of the total corpus collected in the NPS as a lump-sum amount. This component is tax-free. The remaining 40% must be used to obtain one or more annuities (Annuities in an NPS scheme are simply the standard monthly income or payments that NPS subscribers get after retirement). This annuity will be purchased using 40% of our NPS corpus. It is a compulsory component of the NPS, assuring a consistent source of income for retirees.
Previously, NPS users may withdraw the 60% lump-sum component all at once or defer it over time. If they defer it, they are permitted for one withdrawal each year.
However, the Systematic Lump-sum Withdrawal (SLW) function now allows us to withdraw funds from the lump-sum part in phases. Withdrawals will be granted on a monthly, quarterly, semi-annual, or annual basis until the age of 75.
Investors should also keep in mind that the annuity choice, regardless of whether the SLW facility is used or not, will stay at 40% of your entire NPS corpus.
You can dictate your cashflow needs:
This SLW feature will provide NPS customers additional options. Users will now be allowed to tailor their withdrawals to their financial needs in retirement. Money withdrawals are supposed to be more convenient. Previously, members may withdraw the lump-sum amount in yearly instalments between the ages of 60 and 75. They had to reapply each year when they withdraw, which is sometimes cumbersome for a retired person. But with this SLW facility, they may now simply set up payment instructions for their preferred frequency.
This would provide NPS subscribers with another consistent and reliable source of income, enhancing retirees’ financial stability. This facility will increase the liquidity of the investors and align with their cashflow requirements. The SLW facility also has a dual benefit in that investors do not have to go through the hassle of withdrawing the lump-sum corpus and reinvesting it in another financial instrument, reducing the reinvestment risk of the lump-sum withdrawn corpus. Many investors over the age of 60 might already have cash flows from other sources, such as pensions, rental income, interest income, etc. Some investors might end up withdrawing more than they need. They may then splurge it or reinvest the money in a less productive instrument than NPS.
As a result of this SLW option, they may enable the corpus to remain with NPS while selecting their chosen withdrawal frequency.
As NPS is a low-cost, government-backed vehicle, subscribers cannot go wrong by continuing to invest. NPS members over the age of 60 who do not want to actively oversee their retirement corpus but would prefer to have higher cash flows during the first 15 years of retirement can make use of this SLW option.
Another aspect to consider is that retirees who have a lot of money just after their retirement are more vulnerable to mis-selling by friends, relatives, third-party agents, bank RMs, and so on. This SLW feature in the NPS plan will help them to prevent such scenarios.
Somewhat better planning will work-out well:
Before using this SLW facility, NPS subscribers should carefully examine their cash flow requirements. They should calculate how much money they will need each month, how much they currently have from other sources, and then determine how much to withdraw through the SLW facility. Once the SLW is established, investors will not be able to access the lump-sum component (except perhaps by cancelling the SLW). So, retirees must maintain an independent emergency fund to cover any unforeseen circumstances, if they opt for SLW facility, and get the periodic cash inflows for their retirement years.
However, investors and retirees should keep in mind that this 60% of the corpus remains market-linked. As a result, depending on stock market circumstances, the corpus might decrease more quickly owing to on-going withdrawals or downturn market fluctuations. SLW withdrawals from an equity-only portfolio during an equity market slump cause the corpus to deplete more quickly. It is usually preferable for retirees to lower their equity exposure in NPS after retirement, thus investors considering the SLW option should review their asset allocation.
Tax view of this SLW facility:
Some experts believe that SLW distributions would be tax-free since they would be derived from the 60% of the corpus that may be withdrawn tax free. But some other experts in the financial world also argue that the 60% lump-sum payment is tax deductible only if taken fully or withdrawn at the age of 60 or at superannuation. But if you keep the money invested in NPS by opting for the SLW facility, the corpus may grow, which may attract tax levy when withdrawn. Despite these arguments, however, it remains to be seen how the tax authority will regard the corpus’s increasing component. Unless there is any additional information from the tax authorities on this ambiguity, withdrawal from the SLW facility will be treated as tax-free.
In any case, if you take away the entire 60% corpus and invest it in a mutual fund, bank deposit, or in a stock, the income from such investments would be taxed. So the monies are better off stored at the NPS’s SLW facility until we obtain clarity from the taxman on the tax treatment of the SLW withdrawals.
