Understanding the Basics: NPS vs UPS
The National Pension System (NPS) was introduced in 2004 as a defined contribution scheme, replacing the Old Pension Scheme (OPS).Under NPS, employees contribute 10% of their salary, while the government contributes 14%. The corpus is invested in a mix of government securities, equities, and corporate bonds, similar to mutual funds. Upon retirement, 40% of the corpus must be used to purchase an annuity.
The Unified Pension Scheme (UPS), on the other hand, offers a guaranteed pension of 50% of the average pay for the last 12 months for employees who have served for 25 years or more. The government’s contribution under UPS is set at 18.5%, with the employee’s contribution remaining at 10%. Additionally, UPS includes a minimum monthly payout of Rs 10,000 for those who have worked for at least 10 years, along with a lump sum retirement benefit.
Key Differences Between NPS and UPS
Example Comparison of NPS and UPS
The figures in the table are based on illustrative assumptions regarding the last drawn salary and other factors. Actual outcomes may vary. Source: UTI Pension Fund.
How the Unified Pension Scheme Works
The UPS offers a more secure retirement plan with guaranteed benefits. Here’s a breakdown:
Assured Pension: Employees with at least 25 years of service will receive a guaranteed pension of 50% of their average basic pay.
Family Pension: In case of an employee’s death, their spouse will receive a family pension of 60% of the employee’s pension.
Assured Minimum Pension: Employees with at least 10 years of service will receive a minimum pension of Rs 10,000 per month.
Inflation Indexation: Both the assured pension and family pension will be adjusted for inflation.
Dearness Relief: Retirees under the UPS will receive Dearness Relief.
Lump Sum Payment: Employees will receive a lump sum payment at retirement.
Benefits of Switching to UPS
1. Higher Government Contribution: One of the most significant advantages of UPS is the increased government contribution of 18.5%, compared to 14% under NPS. This boost in contribution is expected to result in a larger pension corpus, ensuring better financial security post-retirement.
2. Guaranteed Pension: UPS guarantees a pension equal to 50% of the average salary over the last 12 months of service. This assurance makes UPS a safer option for risk-averse employees, particularly given the market volatility that can impact the returns on NPS investments.
3. Minimum Payout and Lump Sum Benefits: For employees with at least 10 years of service, UPS offers a minimum monthly payout of Rs 10,000, providing a safety net for lower-earning employees. Additionally, the scheme includes a lump sum payment at retirement, linked to the duration of service, offering further financial support.
Investment Flexibility and Market Risks
While UPS offers a guaranteed pension, it limits the potential for higher returns that NPS might offer through market-linked investments. Under NPS, employees can choose from various investment options, including up to 65% in government securities, 15% in equities, and the remainder in corporate bonds. However, these investments are subject to market risks, and the final pension amount may vary.
In contrast, UPS protects employees from market fluctuations, providing a stable and predictable income stream in retirement. For many, especially those nearing retirement, this stability may outweigh the potential for higher returns under NPS.
Is UPS a Step Backward?
Some may argue that UPS represents a step back from the market-linked reforms introduced with NPS. However, UPS retains the core principle of a defined contribution scheme, with additional safeguards to ensure a minimum pension. It also addresses the growing demand for a guaranteed pension among government employees, without reverting to the unfunded liabilities of the Old Pension Scheme.
