Is NPS Annuity Fixed or Variable? Understand the Risks

About 60 percent of National Pension System subscribers in India do not know whether their retirement annuity will pay a fixed amount or a variable one. This single gap in understanding can cost you lakhs of rupees over a 20-year retirement. The myth that NPS annuity is always fixed is widespread — and dangerous.

Many people believe that once they retire and buy an annuity with their NPS corpus, the monthly payment stays the same forever. That belief is only partly true. The reality depends on which annuity option you pick at retirement.

How the National Pension System Annuity Actually Works

When you turn 60, NPS rules say you must use at least 40 percent of your total corpus to buy an annuity from an insurance company. The remaining 60 percent you can withdraw as a lump sum, tax-free.

The annuity part is where confusion begins. You do not get the annuity from NPS directly. You buy it from an Annuity Service Provider (ASP) — an insurance company empanelled by PFRDA.

The Fixed Annuity Option

Most subscribers pick a fixed annuity. Here, the insurance company promises a set monthly payment for life. If you buy an annuity worth 20 lakh rupees at a 6 percent rate, you get about 10,000 rupees per month. That number never changes.

This sounds safe. But think about what 10,000 rupees will buy you in 2045 compared to 2025. With 6 percent inflation, your purchasing power drops by half in just 12 years.

A fixed annuity protects you from market risk but exposes you fully to inflation risk. You trade one danger for another.

The Increasing Annuity Option

Some ASPs offer an annuity with annual increase. Your starting payment is lower — maybe 7,000 rupees per month instead of 10,000. But it grows by 3 to 5 percent each year.

This partially fights inflation. The catch? The total payout only beats the fixed option if you live long enough — usually past 75 or 80.

Variable Returns Through NPS Itself

Here is what most people miss. The NPS corpus itself — before you buy the annuity — earns variable returns. Your money sits in equity, corporate bonds, and government securities. Those returns move up and down with markets.

So the accumulation phase is fully variable. Only the payout phase can be fixed. This two-part structure confuses subscribers who think "NPS is fixed" or "NPS is risky." It is both, at different stages.

Evidence For and Against Fixed NPS Annuities

The Case for Fixed

• Predictability — You know exactly what hits your bank account each month. Budgeting becomes simple.
• No market anxiety — Stock crashes do not touch your annuity payment.
• Spousal protection — Most fixed annuities offer a joint-life option. Your spouse continues receiving payments after you pass away.

For retirees with no other income source, this certainty matters. You cannot afford a 30 percent drop in monthly income because markets fell.

The Case Against Fixed

• Inflation eats your income — A fixed 10,000 rupees per month feels comfortable today. In 15 years, it buys half as much.
• Low annuity rates — Current rates hover around 6 to 7 percent. Compare that to a simple fixed deposit giving 7.5 percent with more flexibility.
• No liquidity — Once you buy an annuity, that money is gone. You cannot withdraw it for emergencies.
• Insurance company risk — Your annuity depends on the insurance company surviving and staying solvent for 25-plus years.

The real risk is not whether your annuity is fixed or variable. The real risk is whether your annuity income keeps up with the cost of living.

What About Systematic Withdrawal Plans?

Some financial planners suggest using the 60 percent lump sum to create a systematic withdrawal plan (SWP) from mutual funds. This gives variable but potentially higher returns. Combined with a smaller fixed annuity, you get both stability and growth.

This hybrid approach works well on paper. But it needs discipline and some market understanding — not every retiree wants that responsibility.

Real-World Example: Two Retirees, Two Choices

Imagine Ramesh and Sunil both retire in 2025 with an NPS corpus of 50 lakh rupees each.

Ramesh puts the mandatory 20 lakh rupees into a fixed annuity at 6.5 percent. He gets about 10,800 rupees per month. He invests the remaining 30 lakh rupees in fixed deposits.

Sunil puts 20 lakh rupees into an increasing annuity starting at 5 percent (about 8,300 rupees per month, rising 3 percent yearly). He puts 30 lakh rupees into a balanced mutual fund SWP.

In year one, Ramesh has more monthly income. By year 12, Sunil overtakes him. By year 20, Sunil receives nearly 40 percent more per month — assuming moderate market returns and 6 percent inflation.

Neither choice is wrong. But only one accounts for the fact that retirement can last 25 to 30 years.

The Verdict on NPS Annuity Risk

The National Pension System annuity can be fixed or increasing — the choice is yours at retirement. But calling it "safe" just because the monthly number stays the same ignores inflation, which is the biggest threat to retirees.

My recommendation: unless you have zero risk tolerance, pick the increasing annuity option even though the starting amount is lower. Combine it with a diversified withdrawal strategy for your lump sum portion.

Check the latest annuity rates and ASP options on the PFRDA website before you retire. Rates change, and even a 0.5 percent difference compounds into lakhs over 20 years.

Your future self will thank you for choosing growth over false comfort.