Retirement
UPS OR NPS:
WHICH ONE SHOULD
YOU CHOOSE?
The government has announced the
Unified Pension Scheme for central
government employees, who will get a
one-time option to switch to it. We help
you decode which one you should choose
between UPS and NPS
Versha Jain
50 Outlook Money July 2024 www.outlookmoney.com
A
bout a month after retroactively to allow those interested addition to lump sum. However,
the Union Budget was in switching to UPS. All government more clarity is awaited on it.
announced in July employees will get a one-time option Clarity Awaited: Although the
2024, the government to switch to the new plan. broader framework of the scheme
approved the new Assured Pension: UPS offers has been revealed, clarity on specific
Unified Pension Scheme (UPS) for assured pension of up to 50 per terms, such as “proportionate
central government employees, as an cent of an employee’s average salary pension”, is yet to be explained. For
alternative to the National Pension drawn in the last 12 months before instance, questions about whether
System (NPS). retirement. However, one has to the employees’ contributions will
Around 20 years ago, when NPS complete 25 years of service to be invested and who will manage
replaced the Old Pension Scheme avail of this. If the service period is the investments remain. It is also
(OPS) in January 2004, it faced less than 25 years, but more than unclear if the death-cum-retirement
a lot of opposition. NPS allowed 10, the pension will be reduced gratuity (DCRG) available in NPS
the transition from a defined to a proportionately. and OPS would also be extended to
market-linked benefit scheme, but Family Pension: If the pensioner UPS. DCRG is a lump sum amount
the fact that the returns couldn’t dies, the family will get an assured paid to an employee based on their
be guaranteed became a bone of pension of 60 per cent of the total length of service at the time of
contention. Its adoption, though, is deceased employee’s pension. retirement or death.
considered a fiscally prudent move. Says Achyutananda Hazarika, who
Initially, all states except West works at the Assam employment
Bengal adopted NPS, but several UPS offers an assured exchange and is the president of the
state governments, such as Rajasthan pension up to 50 per government employees’ association
and Himachal Pradesh later returned cent of an employee’s in the state, “Under UPS, if an
to OPS due to popular demand average salary drawn employee works for over 10 years
despite the burden on the treasury. but less than 25 years, he/she will
The Bharatiya Janata Party’s (BJP)-
in the last 12 months, get proportionate pension with a
led government stuck to its guns on upon completion of 25 minimum of `10,000 per month. The
NPS. The announcement of UPS is years of service, along word ‘proportionate’ has not been
being seen as a climbdown for the with a lump sum defined. It should be the same as the
government after the June 4 results, proportionate calculation in OPS.”
which saw the ruling BJP’s Lok
Sabha tally reduced to 240 from 303, UPS VS OPS
apparently due to discontent over Minimum Pension: UPS provides an UPS is also under flak by some
issues like NPS, unemployment and assured minimum pension of `10,000 quarters because though it is similar
price rise. after completing 10 years of service. to OPS, it doesn’t offer the same
The new UPS is something in Contribution: The employee will benefits. To start with, the employee
between OPS and NPS. For instance, contribute 10 per cent of the basic need not make any contribution in
like OPS, it is a defined benefit plan wage plus dearness allowance (DA), OPS unlike UPS (see What Does Old
where the amount of pension is fixed and the government 18.5 per cent. Pension Scheme Offer? and How Do
as a percentage of the last salary. The government will review its UPS & NPS Compare?).
On the other hand, like NPS, the contribution every three years, but Says Hazarika: “UPS is silent on
employee will need to contribute the employee’s part will remain fixed. the return of employee contribution
towards UPS. Let’s find out more Inflation-Beating Pension: This is of 10 per cent. It should be repaid
about the scheme and how it one of the most attractive features with interest. If not, one will get a 10
compares with NPS and OPS. of UPS and makes it similar to OPS. per cent higher salary under OPS for
The pension amount will be adjusted the same post and service.”
WHAT DOES UPS OFFER? for inflation based on the Consumer
While the scheme’s general outline Price Index. UPS VS NPS
has been made public, some vital Lump Sum: Employees will get a Unlike NPS, UPS is a defined benefit
details are yet to be announced lump sum equivalent to one-tenth of plan. Payment of a predefined
and officially notified. The deadline their salary for every six months of pension amount has been the biggest
to implement the scheme is service, apart from regular pension. demand of employees protesting
April 1, 2025, and will be applied Gratuity: It will be provided in against NPS. Says Gaurav Sharma,
www.outlookmoney.com July 2024 Outlook Money 51
Retirement
UPS Vs NPS
A comparison of how much pension you will get if you are an aggressive
or moderate investor across three age groups
Assumptions
Retirement Lifespan Current Basic Current Dearness Growth In Basic Pay, DA, NPS Expected Return
Age (Years) (Years) Salary Allowance (DA) And Increase In Pension Annuity From NPS Lumpsum
60 90 ` 1 lakh 50% After Retirement 5% Rate 6% After Retirement 7%
Expected DA rate at retirement has been arrived at after considering the current DA rate, the number of years to retirement, and the expected growth in DA
every year, Assuming that all age groups opened NPS at age 25; for older age groups the salary would have increased to `1 lakh at the given age
FOR AGGRESSIVE FOR MODERATE
UNIFIED PENSION SCHEME (UPS) INVESTORS INVESTORS
Number Expected Expected UPS NPS Corpus Needed
Current Excess/Deficit Excess/Deficit
Of Years DA At Monthly Pension to Match UPS Monthly
Age Under NPS Under UPS
To Retire Retirement Including DA Pension (including DA)
25 years 35 Years `6,05,777 `8,75,011 `17,50,02,154 `2,01,43,978 `-4,15,24,527
35 years 25 Years `2,89,251 `4,54,538 `9,09,07,505 `3,12,31,155 `-45,28,050
45 years 15 years `1,26,839 `2,28,311 `4,56,62,173 `2,28,08,434 `39,16,876
FOR AGGRESSIVE FOR MODERATE
NATIONAL PENSION SYSTEM (NPS) INVESTORS INVESTORS
Expected NPS Expected NPS
Number Of Current Total NPS Expected DA
Corpus At Corpus At
Current Age Years To Contribution At Retirement
Retirement Retirement
Retire Each Month
@10% Growth @ 8% Growth
25 years 35 Years `36,000 `6,05,777 `19,51,46,132 `13,34,77,627
35 years 25 Years `36,000 `2,89,251 `12,21,38,660 `8,63,79,455
45 years 15 years `36,000 `1,26,839 `6,26,86,742 `4,95,79,049
AGGRESSIVE INVESTORS MODERATE INVESTORS
NPS For All Age WINNER UPS For 25 And 35 Years;
Groups Taken NPS For 45 Years
Source: Wealth Crafts, Sebi-RIA
52 Outlook Money July 2024 www.outlookmoney.com
42, a central government employee:
“NPS may give me good returns HOW DO UPS & NPS COMPARE?
over the long term, but with UPS, I
will know exactly how much I will Feature UPS NPS
receive. That is more important to Central government All citizens,
Eligibility
me because it offers certainty and employees including NRIs
peace of mind.”
50% after 25 years.
Still, one can’t reject NPS simply Pension Proportional for Market-linked
because of the lack of guaranteed 10-25 years of service
benefits. Says Ankit Jain, partner,
Ved Jain and Associates, a Delhi- Family Pension Assured 60% Based on selected option
based chartered accountancy firm: As per corpus
Minimum Pension `10,000 per month
“Choosing between NPS and UPS is accumulated
not straightforward. UPS is a defined
Employee Contribution 10% of basic plus DA 10% of basic plus DA
benefit scheme with predictable
income after retirement. In contrast, Govt. Contribution 18.5% 14%
NPS helps in building wealth but
Inflation Indexation Yes No
does not offer guaranteed income.”
Contribution: NPS is a market- Lump Sum Amount 1/10th of basic+DA* No
linked, contributory scheme overseen
Gratuity Yes Yes
by the Pension Fund Regulatory and
Development Authority (PFRDA). Tax Benefit Unclear as of now Yes
In NPS, the employee contributes 10 *Of the last salary, for every six months completed in service Source: Outlook Money Research
per cent of the salary towards their
retirement fund, and the government
14 per cent. In UPS, the government that the maximum equity exposure is the spouse.
will contribute 18 per cent. 75 per cent. A subscriber proficient Pension: The pension will vary
Reach: The reach of NPS is much in investing can adjust their equity under NPS, but stay fixed under UPS.
wider, as it is available for all allocation downwards as they near Says Vivek S.G., a certified
employees, including those from the their retirement age to reduce risks.” financial planner and founder of
private and unorganised sectors. As The auto option is for those who Wealth Crafts, a Securities and
of now, UPS has been announced lack the time or expertise to manage Exchange Board of India-registered
only for central government their funds. The investing options investment advisor (Sebi-RIA): “UPS
employees. So only 2.3 million people include conservative, moderate provides guaranteed pension with
are expected to benefit from it. and aggressive modes. The equity inflation adjustments. It is ideal for
Flexibility: NPS has auto and exposure is determined based on the those seeking guaranteed pension.
active investment modes and option selected and the subscriber’s Conversely, NPS offers pension based
offers flexibility to switch between age. The equity exposure in the on the market performance of the
the two. It also allows lump sum portfolio is gradually reduced to invested funds. It doesn’t guarantee
and systematic withdrawals on protect it against volatility. a fixed amount, but has the potential
superannuation, among other key Taxation: Experts are not quite for higher returns. So, it is suitable
features. But it is still unclear how sure on the tax relief for UPS for those willing to take risks.”
UPS will work. contributions. According to Jain, at Family Pension: Jain points to
Says Sriram Iyer, CEO of HDFC the time of contribution, employer another crucial factor: “If the
Pension Management, one of the contribution would not form a part employee dies during or after service
NPS pension fund managers: “NPS of the income and, therefore, would in UPS, the spouse is eligible to
is low-cost with numerous features not be chargeable to tax. He also receive a family pension at 60 per
which make it flexible. In the active expects that deduction for employee cent of the amount. However, no
option, the subscriber can decide contribution might not be available, pension is payable to their adult
the allocation to equity, debt, and especially in the new tax regime. At children after the spouse’s death.
government securities based on their the time of receiving pension, the Under NPS, the corpus will be
risk profile, and change it up to four entire amount could be chargeable available to the family, be it the
times a year without any cost or tax to tax as pension income for the spouse, adult children or legal heirs.”
implications. The only limitation is employee and as family pension for He adds: “Under NPS, one can
www.outlookmoney.com July 2024 Outlook Money 53
Retirement
WHAT DOES OLD PENSION SCHEME OFFER?
It provides assured pension for life OPS offers the General
without employee contributions. Provident Fund (GPF), where
only employees contribute
The government allocates the and can earn higher interest
pension fund from the Budget. rates than on fixed deposits.
Employees receive 50% of Pension revised twice a year for
their last drawn salary and inflation-indexation under DA.
DA as pension.
OPS Upon the employee’s death,
The minimum monthly the family receives 60% of
pension is `9,000. the pension amount.
OPS provides gratuity The in-hand pension is taxable
benefits up to `20 lakh. as per income tax slabs.
opt for annuity with return of higher risk tolerance might consider easy answer. However, Iyer notes,
purchase price. In such a scheme, the staying with NPS.” “If one saves for retirement over
subscriber will get annuity for life It’s also important to consider a long period, even with higher
time and on death of the subscriber, taxation when calculating the equity exposure and consistently,
the purchase price will be returned to returns. Besides, returns also depend the chances of negative returns
the nominee of the subscriber.” on how long one stays invested. A are almost nil. A Nifty 50 analysis
Returns: Says Jain, “Since the younger employee will have a longer shows that over any 20-year period,
structure of these two schemes is time horizon for his/her equity the average annualised returns are
different, there will be a difference in investments to grow. around 12 per cent. The likelihood
returns. Under NPS, the employee of achieving over 10 per cent returns
has control of where the amount is WHAT TO CONSIDER? per annum during any 20-year
invested, and thus the return will Inflation indexation is a major benefit period is about 92 per cent.” So, the
vary based on the contributions. in UPS, as it is guaranteed by the chances of facing negative returns
In UPS, the invested funds are government with assured pension. are almost negligible.
irrelevant as the employee would get So, NPS returns need to grow in While there are many like Sharma
a guaranteed pension of 50 per cent line with inflation for it to be more who would want a guaranteed
of the basic pay.” attractive. Since 2004, when NPS was monthly pension, there are others
So, NPS may work better for first introduced, inflation has ranged who may prefer NPS, especially the
aggressive investors, while UPS between 3.3 per cent and 12 per cent, younger employees who have a long
would be more suitable for moderate according to World Bank data, with service period ahead and can benefit
investors. Additionally, UPS provides the highest recording in 2010. NPS from the market-linked plan.
a guaranteed lump sum equivalent returns since inception have averaged Jain says, “For those who value
to one-tenth of the salary for every 14 per cent from equities, 9.10 per security and peace of mind, UPS
completed six months of service. cent from corporate bonds, and 8.84 would be a better option. For
Says Vivek, “The higher upside per cent from government securities, those who can manage wealth
potential for an aggressive NPS according to PFRDA data as on and understand the intricacies of
profile could provide a significant September 14, 2024. So, overall, NPS investing, NPS is the way to go.”
cushion, even if returns fall below returns have outpaced inflation. So, assess your life stage and
10 per cent. Hence, a person with It’s natural for most people to opt situation before choosing one.
moderate risk appetite may want to for assured money when there is
switch to UPS, while someone with uncertainty around. So, there is no With inputs from Sanjeeb Baruah
54 Outlook Money July 2024 www.outlookmoney.com
www.outlookmoney.com July 2024 Outlook Money 55
