As the government continues to refine its pension systems to ensure financial security for retirees, they are set to implement a new Unified Pension Scheme (UPS) starting 1 April 2025. This scheme is specifically designed for central government employees and comes as an alternative to the existing National Pension Scheme (NPS). Both schemes have distinct features that cater to the diverse needs of employees across sectors, with the UPS offering a more structured and predictable pension plan, while the NPS is market-driven and offers flexibility.
Pension structure: Under the newly introduced UPS, employees are assured a guaranteed pension amounting to 50% of their average basic pay, calculated over the last 12 months before retirement. This pension is applicable to those with a minimum of 25 years of service, while employees with 10 to 25 years of service receive a proportionately reduced pension. In contrast, the NPS is a market-linked pension scheme where the pension depends on the returns generated from contributions invested in various financial instruments, including equity and debt. “Unlike the UPS, the NPS does not guarantee a fixed pension, making the final amount subject to market performance,” said CA (Dr.) Suresh Surana.
The UPS also includes a minimum assured pension of Rs 10,000 per month for employees with at least 10 years of service, offering a safety net that the NPS lacks. Additionally, the UPS provides inflation protection through indexation based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), ensuring that the pension amount keeps pace with rising living costs.
Contributions: Employee contributions under both schemes are similar, with each contributing 10% of their basic salary. “However, the government’s contribution varies, with the UPS featuring an 18.5% contribution from the government, compared to 14% under the NPS,” added Surana.
Family pension: The family pension structure also differs between the two schemes. The UPS guarantees a family pension of 60% of the employee’s pension in the event of their death, ensuring financial security for dependents. On the other hand, the NPS family pension is determined by the accumulated corpus and the annuity plan selected at retirement, which may result in significant variations in the pension amount.
Applicability and coverage: The UPS is specifically designed for central government employees and will become applicable from April 1, 2025. In contrast, the NPS, which was initially targeted at government employees, has been expanded to include private sector employees as well.
Retirement benefits: One of the major benefits of the UPS is its guaranteed fixed pension, coupled with provisions for inflation adjustments, making it a more predictable and secure option for retirees. The NPS, while offering flexibility in withdrawals and investment options, lacks guaranteed returns, making it a less predictable choice. Transition options: Current government employees enrolled in the NPS will have the option to transition to the UPS. This transition could potentially allow employees to receive arrears with interest, making the UPS an attractive alternative.