The annuity is the least popular product in Indian retirement planning and the one most people are legally required to buy. At 60 the NPS forces at least 40% of your corpus into one; leave early and the floor rises to 80%. Understanding what that purchase actually buys — and what it costs — is therefore not optional for an NPS subscriber.
What you are actually buying
An annuity is a contract with a life insurer: you hand over a lump sum, and it pays you a fixed amount for as long as you live. You are not buying a return. You are buying longevity insurance — protection against the specific risk of outliving your money, which no portfolio can eliminate because no portfolio knows how long you will live.
The price of that protection is steep and shows up in three places at once:
The rate is low. Annuity rates typically sit below what the same money would earn in a debt fund or even SCSS, because the insurer is pricing in its own longevity risk, its costs and its margin.
The payment is nominal and fixed for life. Thirty years of even moderate inflation does most of the work of making it small. This is the single largest objection to annuitisation in a country with India's inflation history — the mechanism is how inflation quietly eats a savings account, and a fixed annuity is maximally exposed to it.
The income is taxed at slab, every year, for life. Unlike the NPS lump sum, which comes to you tax-free, the annuity stream is ordinary income — a point developed in the NPS tax breaks.
The variants, and the trade in each
Insurers offer a menu, and each option buys safety by lowering your monthly payment:
- Life annuity — pays until you die, then stops. The highest monthly figure and nothing for your heirs.
- Life with return of purchase price — pays less each month, but the original corpus goes to your nominee. Popular for exactly that reason, and the most expensive option in income terms.
- Joint life — continues to your spouse after your death. Lower than a single-life payout, and usually the right choice for a couple with one pension between them.
- Annuity with a guaranteed period — pays for a minimum number of years regardless, protecting against dying shortly after purchase.
There is no free lunch on this menu. Every protection is paid for out of the monthly figure, and comparing quotes across insurers on the same variant is the only comparison that means anything.
How to think about the compulsory 40%
Since the NPS annuity is not optional, the useful questions are narrow ones:
Do not annuitise more than you must. The 60% lump sum is tax-free and yours to deploy; a SWP from a portfolio you control is more flexible, more tax-efficient and inflation-adjustable in a way no fixed annuity is. The comparison is set out in the 4% rule versus an SWP.
Shop the annuity, and shop the variant. Rates differ across insurers for identical contracts, and the decision is irreversible.
Read the compulsion as insurance, not investment. Judged as an investment the annuity loses to almost everything. Judged as a floor that cannot run out while you are alive, sitting beneath a portfolio that carries the growth and the inflation defence, it does a job nothing else does. That layered structure — guaranteed floor, portfolio on top — is the same one in building a passive income stream.
⚠️ Annuity rates, variants, the NPS annuitisation floor and the taxation of annuity income are all subject to change by insurers, PFRDA and the Budget. Verify current terms before purchase — WealthTicker is not a SEBI-registered investment adviser.
Key takeaway
An annuity buys longevity insurance, not returns, and pays for it with a low rate, a payment fixed in nominal terms for life, and slab taxation on every rupee. The NPS makes at least 40% of it compulsory at 60 and 80% before then. Annuitise the minimum, shop the variant carefully because the choice cannot be undone, and let a portfolio you still control carry the growth and the inflation defence.
Terms used here
More in Module 12 — Retirement: the pension layer and the government's schemes
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