NPS Or UPS? How The Two Pension Schemes Differ And Which Is Right For You — Explained
Deciding between the NPS and UPS depends on the risk appetite and retirement objectives of the government employees.
Government employees have a choice between the National Pension System (NPS) and Unified Pension Scheme (UPS), with the deadline to opt for the latter ending on Sept. 30. The original deadline was June 30, but the Finance Ministry later extended the same by three months.
The NPS offers market-linked growth based on the contributions made by a government employee. The scheme has been designed for long-term capital appreciation, allowing the government employees to build a sizable retirement corpus. On the other hand, the recently introduced UPS assures a minimum guaranteed pension.
Let’s take a look at which pension scheme could be suitable for a government employee.
National Pension System
The scheme was introduced in 2004, replacing the Old Pension Scheme (OPS) for government employees. In 2009, it was expanded to include private-sector workers, self-employed professionals and NRIs.
Under NPS, employees make regular contributions, and at retirement (age 60), 40% of the accumulated corpus must be used to buy an annuity, while the remaining 60% can be withdrawn as a tax-free lump sum.
Pros Of NPS
Potentially higher returns through market-linked investments.
60% of corpus can be withdrawn as a lump sum at retirement.
Tax benefits under Sections 80C, 80CCD(1B), and 80CCD(2) of the Income Tax Act, 1961.
Cons Of NPS
The returns are linked to market risks and pensions are not guaranteed.
Also, 40% of the corpus must be used for annuity plans, which reduces immediate liquidity.
Unified Pension Scheme
The UPS, announced in 2024, is meant to deliver a guaranteed pension. It currently covers all central government employees. Those already covered under NPS can choose to shift to UPS. The plan provides a pension of 50% of the average of the basic pay for the 12 months prior to retirement for employees with 25 years or more of service. A minimum pension of Rs 10,000 a month at superannuation is paid to employees with 10 years or more of service. In the event of the pensioner’s death, 60% of the last drawn pension is paid to their family.
Employees contribute 10% of their basic salary and DA, while the government contributes 8.5%.
Pros Of UPS
Guaranteed pension amount based on the last 12 months’ basic salary.
Family pension ensures financial security for dependents.
Inflation-linked adjustments preserve purchasing power.
Gratuity benefits included.
Cons Of UPS
May not be suitable for someone seeking early retirement.
Less flexibility compared to market-linked NPS.
NPS Vs UPS: What To Choose
NPS For Flexibility And Market-Linked Growth
NPS allows government employees to choose their investment options and fund managers. It also provides tax benefits under various sections of the I-T Act. It could be suitable for employees looking for market-linked growth and a pension based on contributions.
UPS For Assured Pension With Government Support
The scheme offers a guaranteed pension amount equal to 50% of the last 12 months’ average salary for employees with at least 25 years of service. It is ideal for government employees seeking a secure and predictable retirement income.
