What is an annuity? How your pension pot becomes a monthly income
You've spent decades building a pension pot. On the day you retire, how does a lump sum become a salary that arrives every month? For most people the answer is an annuity.
What an annuity is
An annuity is a contract with a life insurance company. You pay a lump sum, called the purchase price, and in return the insurer pays you a fixed income for as long as you live, however long that is. It's the closest thing to a salary that never stops.
Where annuities fit in NPS
When you exit NPS at retirement, part of your pot buys an annuity and the rest can be taken as a lump sum. Under the rules notified by PFRDA in December 2025 for the All Citizen model, you can take up to 80% as a lump sum when your pot is above ₹12 lakh, and the rest buys your pension; small pots of up to ₹8 lakh can be withdrawn fully. Rules change, so always check the latest on npstrust.org.in before you exit.
How much income will it pay?
That depends on the annuity rate, the yearly income per ₹100 you put in:
| Pot used for the annuity | At 6% a year | At 7% a year |
|---|---|---|
| ₹25 lakh | ₹12,500 a month | ₹14,583 a month |
| ₹50 lakh | ₹25,000 a month | ₹29,167 a month |
| ₹1 crore | ₹50,000 a month | ₹58,333 a month |
The main types
Life annuity
The highest income, paid for as long as you live. It stops when you die; nothing goes to your family.
Joint life
Continues to your spouse after you. The income is a little lower than a life annuity.
Return of purchase price
Lower income, but the amount you paid goes back to your family when you die.
Increasing annuity
Starts lower and rises every year by a set percentage, to help keep up with rising prices.
What decides your rate
- Your age: the older you are when you buy, the higher the rate, because payments are expected for fewer years.
- The option you choose: extra benefits like a spouse's income or returning the purchase price cost you some income.
- The insurer: rates differ between insurers for the same option, so compare a few quotes.
- Interest rates when you buy: the rate is locked in for life once you buy.
Four things to know before you buy
- The income usually doesn't rise. ₹30,000 a month will buy much less in 20 years. An increasing annuity, or keeping some money invested, can help.
- It's taxed like a salary. Annuity income is added to your income and taxed at your slab rate.
- It's usually permanent. Most annuities can't be cancelled once they start, so choose the option carefully.
- Think about your family. If your spouse depends on your income, a joint-life option is often worth the lower payout.