With the introduction of the Unified Pension System, it is essential to understand how it measures up against the existing National Pension Scheme (NPS) and the traditional Old Pension System (OPS).
NPS involves investing a portion of the funds in the equity market, making it a relatively market-linked pension scheme. On the other hand, UPS, short for the Unified Pension Scheme, is designed as a fixed-income plan offering guaranteed returns. OPS, on the other hand, offers government employees a secured pension plan once they have fulfilled a minimum of a decade of service. This pension is calculated based on their final basic salary and the total number of years they have served in the government.
Take-home pension under UPS
Let’s first compare how much your take-home pension would be in salary brackets ranging from Rs 25,000 to Rs 1 lakh.
Consider the pension amount that would be received from UPS with an annual salary growth of 5 per cent.
Salary at 25 years: Rs 25,000
One-time payout: Rs 4.83 lakh
Guaranteed annual pension: Rs 4.14 lakh
Salary at 25 years: Rs 50,000
One-time payout: Rs 9.65 lakh
Guaranteed annual pension: Rs 8.27 lakh
Salary at 25 years: Rs 75,000
One-time payout: Rs 14.48 lakh
Guaranteed annual pension: Rs 12.41 lakh
Salary at 25 years: Rs 1 lakh
One-time payout: Rs 19.31 lakh
Guaranteed annual pension: Rs 16.55 lakh
Source: Value Research
Pension under NPS
Calculating the pension income that could be obtained through NPS under the assumption of a 5% annual salary increase, a post-retirement fund growth of 10%, and a 6% withdrawal rate during retirement.
To reach a corpus of Rs 1.08 crore by the age of 60, individuals starting with a salary of Rs 25,000 at 25 will need to diligently save and invest over the years.
Similarly, those starting with a salary of Rs 50,000 at 25 will aim for a corpus of Rs 2.17 crore by 60, while individuals starting with a salary of Rs 75,000 at 25 will target a corpus of Rs 3.25 crore.
Those beginning with a salary of Rs 1 lakh at 25 will strive to build a corpus of Rs 4.33 crore by the age of 60.
UPS vs NPS
UPS offers a unique retirement scheme that blends features of both defined contribution and defined benefit plans. Employees are required to contribute 10% of their basic salary and dearness allowance (DA), while the government contributes a substantial 18.5% of the employees’ basic salary and DA. Comparatively, the government’s contribution to UPS exceeds that of the National Pension Scheme (NPS), where the government contributes 14%.
To qualify for UPS, government employees must have served a minimum of 10 years. One standout feature of UPS is the guaranteed pension of 50% of the last drawn salary, determined by averaging the last 12 months. This dependable assurance ensures financial stability for retirees, unaffected by market fluctuations. UPS offers a secure pension plan that mitigates uncertainties typically associated with market volatility.
Under UPS, employees who have worked for 25 years or more are entitled to receive a pension equal to 50% of their average basic pay in the final 12 months before retirement. Those with a minimum of 10 years of service will receive a proportional pension payout. Additionally, there are provisions in place to adjust for inflation, ensuring the long-term value of the pension.
For starters, UPS’s lump sum payout is available only at retirement. So, if you leave your government job before retiring, you might miss out on this benefit. Also, UPS provides the spouse with 60 per cent of the last pension but stops the disbursal upon their death. NPS, however, permits fund transfer to heirs.
Employees under the NPS are required to contribute 10% of their salary, with an additional 14% contribution from the government. These funds are allocated toward investments in equities, government securities, and corporate bonds. Upon reaching retirement, 40% of the accumulated retirement corpus must be annuitised. NPS also allows you to withdraw up to 20 per cent of your savings before age 60.