Learn the basics: NPS vs. UPS
The National Pension System (NPS) was launched as a defined contribution scheme in 2004, replacing the Old Pension Scheme (OPS). The corpus invests in a combination of government securities, stocks and corporate bonds, similar to a mutual fund. After retirement, 40% of the funds must be used to purchase an annuity.
The Unified Pension Scheme (UPS), on the other hand, provides a guaranteed pension of 50% of the average salary in the past 12 months to employees with 25 years of service or more. Government contributions under UPS are set at 18.5%, while employee contributions remain at 10%. Additionally, UPS pays a minimum of Rs 10,000 per month to employees who have served for at least 10 years and provides a one-time retirement benefit.
Key Differences between NPS and UPS
Comparison example of NPS and UPS
Figures in the table are based on illustrative assumptions regarding final wages drawn and other factors. Actual results may vary. Source: UTI Retirement Fund.
How the unified pension scheme works
UPS offers a safer retirement plan with guaranteed benefits. Here’s a breakdown:
Guaranteed pension: Employees with more than 25 years of service will receive a guaranteed pension of 50% of the average basic salary.
Family pension: When an employee dies, his or her spouse will receive a family pension of 60% of the employee’s pension.
Minimum pension guarantee: Employees with more than 10 years of service can receive a minimum pension of Rs 10,000 per month.
Indexation for inflation: Both the guaranteed pension and the family pension will be adjusted for inflation.
Dear Relief: Retirees under UPS will get family deduction.
One time payment: Employees will receive a lump sum payment upon retirement.
Benefits of switching to UPS
1. Higher government contribution: One of UPS’s most significant advantages is an 18.5% increase in government contributions, compared to NPS’s 14% contribution. The increase in contributions is expected to result in larger pensions, ensuring better financial security in retirement.
2. Guaranteed pension: UPS guarantees a pension equal to 50% of average salary earned over the past 12 months of service. This guarantee makes UPS a safer choice for risk-averse employees, especially considering that market fluctuations can impact NPS investment returns.
3. Minimum payment and one-time benefits: For employees with at least 10 years of service, UPS provides a minimum monthly payment of Rs 10,000, providing a safety net to low-income employees. In addition, the plan also provides further financial support by including a lump sum payment at retirement linked to the length of service.
Investment Flexibility and Market Risk
While UPS provides a guaranteed pension, it limits the potential for higher returns that NPS may offer through market-linked investments. Under the NPS, employees can choose from a variety of investment options, with up to 65% in government securities, 15% in equities and the remainder in corporate bonds. However, these investments are subject to market risk and the final pension amount may vary.
In contrast, UPS protects employees from market fluctuations, providing a stable and predictable source of income in retirement. For many, especially those approaching retirement, this stability may outweigh the potential for higher returns from NPS.
Has UPS regressed?
Some may argue that the UPS represents a step back from the market-related reforms introduced by the NPS. However, UPS retains the core principles of a defined contribution plan and provides additional safeguards to ensure a minimum pension. It also addresses the growing need for government workers to secure their retirement benefits without reviving the unfunded liabilities of old pension plans.
