UPS vs NPS: Investors should invest this amount to get Rs 90,000 pension after retirement

The implementation of the Unified Pension Scheme (UPS) for central government employees is slated for April 1, 2025. This new pension scheme aims to fulfill the persistent request of central government employees for a guaranteed pension similar to the one prior to the introduction of the National Pension System (NPS).

Starting April 1, 2025, central government employees, excluding those in the armed forces, must decide between the National Pension System (NPS) and the Unified Pension Scheme (UPS) for their post-retirement financial security. 

Each scheme offers distinct benefits and risks, necessitating careful consideration of individual financial goals. Under the UPS, employees can expect a government-backed guaranteed pension, while the NPS provides market-linked returns. T

UPS vs NPS

The UPS has been structured to provide central government employees who choose the scheme with 50% of their average basic pay from the last 12 months as a guaranteed pension upon retirement. Unlike NPS, UPS offers a guaranteed pension amount. Additionally, the returns from NPS are anticipated to be greater in the long term, as a portion of investments in the scheme can be used to generate wealth from equity markets.

To achieve a Rs 90,000 monthly pension, employees need to adhere to specific investment strategies depending on the chosen scheme. 

Investment under UPS

The UPS is designed for those seeking financial stability and lower risk exposure. In this scheme, the government contributes 18.5% of an employee's basic salary plus dearness allowance (DA), with the employee contributing 10%. The pension is calculated as 50% of the average basic salary over the last 12 months of employment. 

For instance, an employee starting at age 25 and retiring at 60 with an estimated average basic salary of Rs 1.8 lakh per month can expect a guaranteed pension of Rs 90,000 monthly. If adjusted for an inflation rate of 4.5% annually, the pension amount will increase slightly to Rs 94,050 by age 61. The UPS focuses on minimal risk by primarily investing in government bonds.

Investment under NPS

On the other hand, the National Pension System (NPS) involves higher risk but potentially higher returns, as it is heavily dependent on market performance. The employee contributes 10% of their salary, complemented by a 14% government contribution. With an estimated average basic income of Rs 1.8 lakh monthly, contributions from both employee and government total Rs 16,800 monthly. 

Assuming an annual return rate of 9%, the total investment over 35 years amounts to Rs 70.6 lakh, yielding a return of Rs 3.79 crore. At retirement, the corpus is expected to be Rs 4.5 crore. A 40% allocation to an annuity, yielding Rs 90,000 monthly at 6% returns, leaves a lump-sum withdrawal option of Rs 2.7 crore. 

Choosing between UPS and NPS

Choosing between UPS and NPS involves assessing one's risk appetite and financial goals. While UPS offers predictable returns with lower risk, NPS provides flexibility in investment choice, ranging from equities to hybrid funds. The NPS also offers tax benefits under Section 80CCD(1B), potentially saving up to Rs 62,400 annually for those in the 30% tax bracket, making it an attractive option for tax-conscious employees. Both schemes require strategic planning to ensure the desired pension outcome of Rs 90,000 monthly.

While both pension schemes offer valuable retirement benefits, government employees must consider their current financial status, future expectations, and risk tolerance before deciding. UPS provides stable and predictable income, appealing to risk-averse individuals, whereas NPS's market-linked approach may suit those willing to embrace some level of market volatility for potentially higher returns. Each scheme demands careful planning to reach the intended pension target, ensuring a comfortable post-retirement life.