NPS Inflation Protection: PFRDA to Launch New NPS Products

The Pension Fund Regulatory and Development Authority (PFRDA) is planning to introduce new NPS products. This will offer inflation-linked pension payouts to protect retirees’ returns. 

Its aim is to address one of the key limitations of the current system, where annuity-based payouts are not adjusted for inflation. 

PFRDA Chairman Sivasubramanian Ramann stated that discussions on these products are in progress and could take approximately 6 months to complete. The proposed inflation-indexed NPS products will also offer the same tax benefits as traditional annuities.

It will help retirees continue to enjoy the financial advantages of the National Pension System while providing protection against rising prices (inflation).

Why Inflation Protection Was Needed in NPS

Under the current National Pension System (NPS), retirees receive a fixed payout through annuities. This payout remains unchanged (i.e., it does not increase) over time. 

While this ensures a steady income, it does not increase with the rising cost of living. As a result, the real value of pension income gradually declines, leaving retirees with reduced purchasing power.

Inflation affects essential expenses such as healthcare, food, and housing, all of which typically rise faster than average income growth. Without inflation adjustment, even a well-planned retirement corpus can fall short in meeting future needs.

PFRDA’s proposed inflation-linked NPS products aim to solve this gap by indexing pension payouts to inflation. It helps retirees maintain a consistent standard of living after retirement. This move by PFRDA will make the NPS more competitive with other retirement pension plans that offer inflation protection globally.

How the New NPS Products Will Work

Currently, NPS subscribers are required to invest at least 40% of their retirement corpus in an annuity, while the remaining 60% can be withdrawn as a tax-free lump sum. The PFRDA may reduce the mandatory annuity portion once the new inflation-indexed payout options are introduced.

The new pension payout products will help with the following:

• Index payouts to inflation
• Same tax benefits as existing annuity products under the Income Tax Act.
• Be tested through a sandbox model
• Revenue neutral

Conclusion

The new pension scheme strikes a balance between market-linked growth and inflation-adjusted stability. For retirees, this means greater financial confidence and protection in later years, as their pension will no longer lose value to inflation. For younger investors, the National Pension System (NPS) becomes a more attractive long-term savings option. 

Source: MoneyControl

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