Deciding on ways to save for your post-retirement life can be daunting. However, planning for retirement ahead of time allows you to enjoy those years in peace. The article below goes over some important details that you should know before deciding which investment choice is best for you. Here is a comparison of annuity plans and NPS.
The National Pension Scheme (NPS) is a government-run social security programme. All employees of the public, private, and unorganized sectors are eligible to participate in the pension scheme. It encourages people to contribute to an NPS account regularly during their working lives to achieve retirement benefits. When you retire, you will receive a monthly pension based on the amount of money you have saved over time.
An annuity plan is a financial instrument that, following a lump-sum investment, provides you with guaranteed annual payments for the rest of your life. The life insurance company invests your money and then pays you back the profits. You may think of it as a payment paid to you in lieu of a pension.
| Basis | Pension plan | Annuity |
| Meaning | A retirement corpus built with regular contributions made by you or your employer over a period. | An agreement where you pay a lump sum (or part payments) to receive a steady income in the future. |
| Payment style | Contributions are made at fixed intervals by the employee, employer, or both | One-time lump-sum payment (or multiple premiums) |
| Offered by | NPS, the government, or your employer | Insurance companies |
| Payment timeline | After retirement, typically between 58 and 60 years | Immediately (immediate annuity) or in the future (deferred annuity) |
| Risk liability | The employer, pension fund manager, or government is responsible for managing risks. | You determine your risk tolerance, as some annuities are market-linked. |
| Payment receipt | Monthly pension or lump-sum withdrawal (60%) + pension | Monthly, quarterly, annually, or lifetime payouts |
| Flexibility | Lower | Higher |
| Contribution limit | Minimum contribution: Rs. 6,000 per year | Minimum contribution: Rs. 18,000 Maximum contribution: Rs. 24,000 |
| Mode of investment | Up to 75% of investments can be made in equity | Do not provide pure equity funds |
| Penalty | You can reactivate your account by paying a small fee if you fail to pay your NPS contributions. | Annuity plans may lapse if you don’t pay premiums on time or within the grace period. Reactivation is possible if you pay all pending premiums during the revival term. |
| Maturity | 60% of the corpus can be withdrawn, with the remaining 40% converted to annuity when the NPS achieves maturity. | Investors can withdraw only one-third of their capital, with the remainder requiring the purchase of a 66% annuity. |
| Ideal for | Private, public, or government-sector employees seeking long-term, predictable retirement income | Retired individuals desiring a fixed, guaranteed income from the start of their retirement |
Selecting the right financial product is crucial for a smooth and stress-free retirement. Here’s a look at the distinct purposes annuities and pensions fulfill and the benefits they offer to help you secure your financial future.
Annuities are designed to convert your savings into a guaranteed income source during retirement. The plans are ideal for those desiring financial certainty and peace of mind. Annuities offer flexible payout options, allowing you to start receiving income immediately or later.
Pensions help you create a strong retirement fund through consistent investment habits. It consists of contributions you, your employer, and the government make, which grow over time and guarantee a monthly income after retirement. The plans ensure financial security and stability in the future.
A comparison of annuity vs NPS isn’t complete without understanding the different types of annuities and pensions.
Unable to understand annuity vs NPS - which one to buy? Here’s a summary that can help.
The decision for the right financial instrument depends on your financial goals, income type, dependents, and risk tolerance. Select the plan most suited to your lifestyle and future needs.
As you can see, both NPS and annuity plans have their own sets of pros and cons. So, when planning for your retirement, choose an investment instrument that suits your unique needs.
If you’re looking for a simple way to get started on your retirement planning investments, download Tata Moneyfy's mutual fund app. Enjoy goal-based investing today.
In NPS, you can withdraw up to 60% of the accumulated corpus as a lump sum at retirement, while the remaining 40% must be used to purchase an annuity. This annuity provides regular pension payments for the rest of your life.
Choosing between NPs and a traditional pension plan depends on your financial goals and needs. NPS offers tax benefits, flexibility in investment choices, and a combination of lump-sum withdrawal and annuity. It is suitable for those seeking a long-term retirement savings plan with market-linked returns. Traditional pension plans often offer guaranteed returns and fixed monthly payouts but may lack the investment flexibility of NPS.
Not every annuity is a pension. An annuity is a financial product that provides regular payments over a specified period, often used for retirement income. While many annuities are designed to serve as pensions, providing income for retirement, some annuities can be structured for other purposes, such as fixed-term payments or lump-sum distributions.
Yes. You can invest 100% of your NPS corpus in an annuity plan on superannuation. Doing so may result in higher income payouts after your retirement. However, it may impact liquidity as you will not receive any lump sum at the time of retirement. A more balanced approach is to withdraw a portion of your NPS corpus as a lump sum and invest the remaining in an annuity.
After the subscriber’s death, the annuity (pension) will be paid to their spouse (if any) for their lifetime. If the spouse is not alive, it will then be paid to the surviving dependent mother or father of the deceased subscriber. Once all such family members have been covered, the original purchase price of the annuity will be returned to the subscriber’s surviving children or legal heir.
NPS allows you to choose from five different annuity options at the time of superannuation. The best annuity option depends on your personal preferences and financial goals. Here’s a simple guide:
In single premium and immediate annuity plans, the minimum payment term can be 5, 10, 15, or 20 years. After this, the subscriber continues to receive annuity payments for the rest of their life. There are also options to extend annuity payouts to the spouse’s lifetime.
Bonds, FDs, mutual funds, dividend-paying stocks, and many others can provide a retirement income. However, annuities are the most popular because of the benefits of a guaranteed income and multiple payout options.
A pension fund allows you to accumulate funds for your retirement by regularly contributing a specific amount into the fund. A retirement annuity requires paying a lump sum to the insurer, who then provides regular payouts at pre-defined intervals or immediately based on your financial requirements.
A pension plan provides post-retirement income. It is either employer-sponsored or purchased individually through various schemes. On the other hand, an annuity plan is purchased from an insurer and gives guaranteed payouts at pre-decided intervals of time.
While having a pension is good, it may not be sufficient for your retirement. An annuity provides an additional guaranteed income, which is ideal for self-employed individuals or those retiring with a lump sum of savings.
Pensions allow a lump sum withdrawal, followed by monthly payouts for the remaining amount. Annuities generally provide regular payouts with no option for lump sum withdrawals once the plan starts.
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19 September 2025
7 mins read
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