Pensions have historically played a vital role in ensuring financial stability for government employees, serving as a significant consideration for individuals entering public service. Recently, pension schemes have garnered considerable attention among employees at both the Central and state levels.
In response to increasing apprehensions regarding retirement income, the Modi government unveiled the Unified Pension Scheme (UPS) on Saturday. This initiative is specifically designed for current participants of the New Pension System (NPS), including those who have retired. However, a pressing question persists: Is it advisable to transition from the NPS to the newly-introduced UPS?
UPS vs OPS: What’s Different?
While the UPS guarantees a pension, it differs significantly from the Old Pension Scheme (OPS). Under the UPS, employees are required to contribute 10% of their basic pay plus dearness allowance, and the government’s contribution has increased to 18.5%, up from 14% under NPS. In contrast, the OPS didn’t require employees to contribute directly to a pension fund, but they did contribute to the General Provident Fund (GPF), which was returned with interest at retirement. The OPS guaranteed a pension based on the last drawn salary, whereas the UPS, which is inflation-linked, reduces the risk of interest rate fluctuations and longer life expectancy, with the government bearing these risks.
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The OPS ensured a fixed pension amount, 50% of the employee’s last drawn salary, providing financial security post-retirement. One of the key benefits was that pensioners under OPS also received a dearness allowance, which was periodically adjusted to counteract inflation.
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Managing the UPS Fund
The UPS, which combines elements of both defined benefit and defined contribution schemes, will need careful management. Both the government and the employee contribute to the fund, with 8.5% of the government’s 18.5% contribution allocated to a guaranteed reserve fund. This reserve will cover any shortfalls in meeting pension commitments. Given the long-term nature of pension liabilities and increasing life expectancy, regular monitoring will be crucial to ensure the scheme’s sustainability. Opinions are divided, with some favouring the UPS, while others believe the OPS was more beneficial.
Adhil Shetty, CEO of Bankbazaar.com, says, “Pensions are vital for ensuring regular income for a large number of government employees. We are currently waiting for more details to assess which scheme offers better benefits in terms of pension payouts.”
The government is expected to provide guidance to help employees decide between the NPS and the UPS. Both current and future employees will have the option to choose between the two schemes, but the decision, once made, will be final.
Tax Implications of UPS
Details on the taxation of UPS are still awaited, but it’s expected that the pension income under UPS will be subject to income tax. The treatment of lump-sum payments is also unclear. Under the NPS, pensioners receive 60% of their accumulated corpus as a tax-free lump sum at retirement, while the remaining 40% is invested in an annuity, which provides a monthly pension subject to income tax.
While equities have historically outperformed other investments over the long term, NPS subscribers can only invest up to 15% of their corpus in equities.
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UPS vs NPS vs OPS: Making the Choice
To summarise, OPS offers a fixed, guaranteed pension based on your last drawn salary – 50% of last drawn basic salary. In OPS there is no contribution required from employees, making it a low-risk option which is ideal for those who are confident in the government’s financial stability.
NPS needs employees to contribute 10% of the salary (basic + DA) and employers also make the contribution of 14% Both employee and government contributions are invested in market-linked funds, which can potentially offer higher returns but come with a degree of risk since there is no guaranteed payment.
UPS blends the best of both worlds; Employees contribute 10% of the salary (basic + DA) and employers also make the contribution of up to 18.5%. UPS offers guaranteed pension of 50% of basic pay drawn in the last 12 months before retirement along with some exposure to market-based returns. It’s a balanced choice for those seeking both security and growth potential.
Pankaj Dhingra, Managing Partner & Co-Founder, FinTram Global LLP, advises, “When choosing between the Old Pension Scheme (OPS), National Pension System (NPS), and Unified Pension Scheme (UPS), it’s crucial to align your choice with your long-term financial goals, risk tolerance, and retirement expectations. Your decision should consider the security of guaranteed returns (OPS), the potential for higher returns with some risk (NPS), or a mix of both (UPS). Consulting a financial advisor can help tailor this decision to your personal financial plans and subsequent goals.”
As more details emerge from the government, it will become clearer which scheme offers better returns and higher pensions for government employees. The implementation of the UPS and further clarifications are eagerly awaited.
