NPS withdrawal rules: SLW vs SUR; how should retirees withdraw their pension corpus?

New Delhi: A person earns for years while planning for future stability, which depends on savings habits and financial choices. Among the many investment tools catering to retirement, the National Pension System (NPS) is quite prominent. It is a government-backed scheme that helps one accumulate dedicated funds that can later be drawn as a pension.

The rules that guide the amount to be withdrawn are based on multiple factors. Moreover, the mode of these withdrawals also depends on the size of the corpus and one's personal situation.

For those with a corpus of up to Rs 8 lakh, there is no limit on the amount that can be withdrawn. A person is free to take the whole amount as a lump sum, use withdrawal options such as Systematic Lump-sum Withdrawal (SLW) and Systematic Unit Redemption (SUR), or opt for other PFRDA-approved options.

If the corpus ranges between Rs 8 lakh and Rs 12 lakh, Rs 6 lakh is allowed to be taken as a lump sum, while the rest is withdrawn through SUR over a period of at least six years. The person may also choose to invest the remaining balance in an annuity.

The rules differ for government employees and non-government subscribers if the total corpus exceeds Rs 12 lakh. Government employees are required to invest at least 40% of the corpus to buy an annuity at normal exit. A private-sector employee, meanwhile, can withdraw 80% of the corpus as a lump sum or through SLW and SUR, while the remaining 20% must be used for annuity purchase.

To better gauge the right path for withdrawing the retirement corpus, retirees should have a clear idea of what they actually require versus what they would get after choosing between SLW and SUR.

Systematic Lump-sum Withdrawal (SLW) fixes the amount withdrawn at regular intervals while keeping the number of NPS units subject to market fluctuations. Despite market performance, the retiree would get the amount fixed earlier. However, if the market goes down, the value of a unit may also fall, which means that more units would be required to generate the same amount. This may lead to a quicker exhaustion of units if the market does not perform well.

For instance, a retiree requires Rs 50,000 every month, and the current Net Asset Value (NAV) of the NPS unit is Rs 10. In this case, 5,000 units would be redeemed to reach the required amount. The next month, if the value of the unit rises to Rs 12, approximately 4,167 units would be needed to generate the same amount. However, if the value drops to Rs 8, the person would have to redeem 6,250 units.

On the contrary, Systematic Unit Redemption (SUR) allows users to fix the number of units redeemed periodically. Thus, the amount received at regular intervals may differ based on market conditions. If the NAV of the unit goes up, the amount withdrawn also increases.

Suppose a person redeems 5,000 units per month, and the current value of the unit stands at Rs 10. The person receives Rs 50,000 in the first month. If the NAV rises to Rs 12, the person would receive Rs 60,000. The amount may, however, be negatively affected if the unit's NAV drops. At an NAV of Rs 8, the amount would total Rs 40,000.

Neither option is devoid of risks; one may put pressure on the number of units in case the market falls, while the other may put the monthly cash flow at risk.

If a person has no other source of income and their financial situation does not allow them to withstand market risks, it is better to opt for SLW. It avoids fluctuations in the withdrawal amount resulting from a lower NAV.

However, if other sources of income exist and the retirement corpus is part of a larger pool of funds, the person may choose SUR. It is better suited for people with a higher risk appetite.