Understanding NPS Annuity

I want to know how the pension is calculated upon maturity in the New Pension Scheme (NPS)? What I know is that 40 per cent of the maturity amount will be given to the account holder immediately, and pension will be given from the remaining 60 per cent. So, how is the pension calculated from that 60 per cent?
-Rakesh

Let us explain this to you with an example. Let's assume that you invest Rs 1,000 per month for 10 years. When you turn 58 years old, and are due for retirement, assuming that your investments of Rs 12,000 per year for 10 years, that is Rs 1,20,000, appreciates to Rs 2,40,000. Now, you can take back 40 per cent of this Rs 2,40,000 when you turn 58. The remaining 60 per cent will be converted to an annuity, which is a product where you don’t get the money back, but you get a fixed income till you survive. Annuity is priced depending upon your longevity. Today, we don’t have a broad market for annuity; it is not a very popular mode of investment. But the LIC offers annuity, which however doesn’t give high returns. But there will be a choice of annuity in the times to come; it will be available in various forms. The annuity that is available today gives a return of 5-7 per cent per annum.

The entry level in the NPS could be at any age before 55.

This article was originally published on January 12, 2012.