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
| Feature | NPS | UPS |
| Type | Defined Contribution | Defined Benefit |
| Pension Guarantee | No | Yes (50% of average salary) |
| Government Contribution | 14% | 18.50% |
| Employee Contribution | 10% | 10% |
| Investment Options | Diverse (equity, debt, government securities) | Primarily government securities |
| Risk | Market-linked | Lower risk due to government guarantee |
Example Comparison of NPS and UPS
| Feature | NPS | UPS |
| Age of Joining | 25 years | 25 years |
| Service Period | 35 years | 35 years |
| Last Salary | Rs 1,36,595 | Rs 1,36,595 |
| Government Contribution | 14% | 18.50% |
| Employee Contribution | 10% | 10% |
| NPS Corpus | Rs 3,59,54,344 | N/A |
| UPS Corpus | N/A | Rs 4,26,95,783 |
| NPS Pension | Rs 1,79,772 | N/A |
| UPS Pension | N/A | Rs 2,13,479 |
| Minimum Monthly Payout | No | Rs 10,000 (for 10+ years of service) |
| Lump Sum Payment | No | Yes |
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.
