 "UPS or NPS: Younger employees and risk-takers likely to stick to NPS")
The central government will introduce the Unified Pension Scheme (UPS) from April 1, 2025, as an alternative to the National Pension System (NPS). Should employees currently with NPS stick to it or switch to UPS?
UPS
UPS merges elements of defined contribution and defined benefit. Employees contribute 10 per cent of their basic salary plus dearness allowance (DA), while the government contributes 18.5 per cent of their basic salary plus DA. The government makes a higher contribution in UPS (18.5 per cent) than in NPS (14 per cent).
Pros: UPS guarantees a pension of 50 per cent of the last drawn salary, based on the average of the last 12 months. “It is an assured pension scheme and does not leave the outcome to the vagaries of market forces,” says Jinal Mehta, founder, Beyond Learning Finance. It thus addresses a key concern government employees enrolled in NPS had.
Mehta points out that government employees must have completed a minimum of 10 years of service to qualify for UPS.
Cons: In NPS, employees can have a higher equity exposure, creating the potential for higher returns over time. “This could be advantageous for employees comfortable with risk as they could benefit from market upswings,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.
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An employee must have completed 10 years of service to be eligible for UPS. Those who retire earlier won’t qualify.
Currently, central government employees are eligible for UPS. Among states, only Maharashtra has so far agreed to adopt it. “Only a limited number of employees qualify for UPS currently,” says Arnav Pandya, founder, Moneyeduschool.
NPS
Under NPS, employees contribute 10 per cent of their salary while the government contributes 14 per cent. The money is invested in equities, government securities, and corporate bonds. Upon retirement, 40 per cent of the corpus must be annuitised.
Pros: Its biggest advantage is the potential to accumulate a larger corpus through higher equity exposure. “Employees also have the flexibility to choose their allocation to the three asset classes,” says Pandya.
Cons: The employee bears the risk. “If the funds invested in perform poorly, the employee bears the consequences,” says Pandya. Numerous choices can also be overwhelming for some.
Moreover, 40 per cent of the corpus at retirement must be annuitised, which reduces flexibility.
How should you decide?
Individuals comfortable with higher risks should stay put in NPS. “Younger employees, who tend to have a higher risk appetite, will find NPS advantageous due to the potential gains from equity markets over time,” says Krishan Mishra, CEO, FPSB India. Remember that volatility becomes less of a concern in equities for investors once the horizon extends to decades.
“For those who are risk-averse and seek a defined benefit, UPS might be a superior option,” says Dhawan.
An employee’s choice should also depend on how her other investments are deployed. If her portfolio is largely in safer instruments, NPS’s equity exposure could add an element of inflation-beating returns to the portfolio. “Conversely, those already investing in equities outside their retirement corpus might prefer UPS for its more defined outcome,” says Dhawan.
Those opting for UPS should not rely solely on it. “Supplement it with additional investments through NPS to enhance retirement security,” says Mishra.
Guaranteed benefits provided by UPS
Assured pension: Employees with 25+ years of service get 50 per cent of their final 12-month average basic pay and DA
Family pension: Spouse receives 60 per cent of the employee’s pension upon the latter’s death
Assured minimum pension: Employees with 10+ years of service get a minimum of Rs 10,000 per month
Inflation indexation: Both pensions will be adjusted for inflation
Lump sum payment: Employees receive a lump sum payout at retirement