Is UPS better than NPS for government employees? Here's how to decide

Time of India

2 days ago

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Bringing back the safety net
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Who is eligible for UPS?
Existing central government employees covered under NPS and in service as on 1 April 2025 (Form A2)
A central government employee who was covered under NPS and who has superannuated or retired before 31 March 2025 (Form B2)
New recruits joining central government services on or after 1 April 2025 (Form A1)
Legally wedded spouse of a retired or superannuated central government employee covered under NPS and expired before exercising option for UPS (Form B6)
What ails UPS
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NPS holds a few aces
Choose your champion wisely
If qualifying service period is more than 10 years but less than 25 years, proportionate payout is payable.
If individual corpus is less than the benchmark corpus as on the date of superannuation or voluntary retirement.
If subscriber opts for final withdrawal not exceeding 60% of the individual corpus, payout is proportionately reduced.
Over 27 lakh eligible central government employees face a critical choice—one that will shape how comfortably they live in their post-retirement years. By 30 June, they must decide whether to continue with the National Pension System (NPS) or switch to the newly rolled out Unified Pension Scheme (UPS) as their retirement chariot. This switch can only be exercised once. It cannot be reversed later. New employees joining the government can also opt for the UPS within 30 days of their joining service. Even as the UPS brings back guaranteed payouts, the NPS offers greater flexibility and potentially a bigger nest egg. Choose your champion carefully.The UPS, operational since 1 April 2025, was introduced by the government as an alternative to the NPS. The latter has many sceptics. The biggest gripe with NPS is that it took away the fixed security net of the guaranteed pension under the previous 'defined benefit' regime. This assured monthly paycheque was replaced with the NPS' market-linked retiral benefits. Here, only the contributions are fixed, the payout is not. The retiral benefits are a function of the accumulated corpus, which itself is vulnerable to market risks. For pension after retirement, the NPS mandates purchase of an annuity out of this accumulated corpus, which locks subscribers into annuity rates offered by the insurer. 'You have no idea what annuity rates will be 20 or 30 years later. If you are offered a poor rate at the time of annuity, your lifetime returns stretching from accumulation phase into the vesting phase fall sharply, even if actual NPS returns were far better,' points out Ravi Saraogi, Co-founder, Samasthiti Advisors.The UPS primarily seeks to address these perceived shortcomings. First, it includes provisions for a guaranteed pension payout after retirement. If you work for 25 years or more in a central government posting, you will receive 50% of your average pay for the preceding 12 months as pension. A pension of Rs.10,000 per month is payable after a minimum of 10 years of service. For service periods between 10 and 25 years, the pension payout will be proportional to the years of service.Further, the pension payout under the UPS will be indexed to inflation, through regular tweaks in the dearness relief. This offers lifestyle protection for retiring subscribers, a missing component in the NPS. 'UPS has an inbuilt feature of dearness relief. While NPS subscribers can also avail of increasing annuity plan, this comes at the cost of lower annuity rate,' points out Deepesh Raghaw, Founder, PersonalFinancePlan.in.Under the UPS, employees contribute 10% of their basic pay, plus dearness allowance, which is matched by the employer. Additionally, the government contributes another 8.5% towards a separate pooled fund, taking its contribution to 18.5% — higher than the 14% offered under the NPS. Also, the UPS provides for the payment of a one-time lump sum equivalent to one-tenth of the last drawn basic pay plus dearness allowance (DA) for each completed six months of qualifying service. For 25 years of service, this is equivalent to five months' pay.At first glance, the UPS seems appealing with an assured, predictable income stream after retirement. The pension simply gets linked to the last drawn salary. Market behaviour has no bearing on this amount.UPS has the edge over NPS in longevity, experts say. Saraogi indicates the lifetime IRR (internal rate of return) for a UPS subscriber who starts earning at age 25 (starting basic pay of `6 lakh a year) works out to 9.37%, assuming salary increases by 8% yearly by age 60 and pension increases at 5% until age 90. To deliver the same lifetime return, NPS must earn 12.24% during the accumulation phase (assuming the individual buys 100% annuity from his NPS corpus at age 60 at the annuity rate of 6%). For a person starting at age 35, the UPS IRR stands at 11.09%. To beat this, NPS corpus must earn a meaty 16.12%. The break-even rate for NPS rises sharply when the individual has 10 fewer years of accumulation. If starting at age 45, the UPS IRR stands at 12.02%, which can only be matched by NPS if it fetches a princely 21.78% in its accumulation phase.This is a high bar for an asset allocation product that gradually pares back equity exposure over time. 'The break-even rates for NPS to beat UPS return over longer time frames are very high. UPS is a clear winner for sustaining a longer lifespan,' avers Saraogi. Over the last five years, the return from a 50:25:25 NPS portfolio split between 50% in equity, 25% in government securities and 25% in corporate bonds has fetched a healthy 14.68% annualised return. This return was riding on outsized 22% annualised return from NPS equity plans. However, returns typically moderate over longer time frames. Over the past 10 years, the 50:25:25 NPS portfolio has yielded a modest 10.8% return. Equity returns are likely to moderate further in the coming decades as the economy matures. This suggests that NPS investors must target larger contributions to match the assured pension payouts of UPS. Basavaraj Tonagatti, Founder and Partner, BasuNivesh Fee-Only Financial Planners, asserts, 'People who are relying entirely on NPS for their retirement corpus and are likely to run a withdrawal rate higher than 4% should consider opting for the UPS.'Employees who retire after completing at least 10 years of government service or those who voluntarily retire after 25 years of service become eligible for UPS benefits'UPS is a safetyfirst approach built on certainty whereas NPS is built on a probabilistic approach with multiple unknowns.'CO-FOUNDER, SAMASTHITI ADVISORSIf you dig deeper, the sweetener of inflation linked, guaranteed pension in the UPS masks several deficiencies.One, even as the employer contributes 18.5% of basic pay plus DA under the UPS, this is split between two accounts. Only 10% goes directly to the 'individual corpus', matching the employee's own contribution. The remaining 8.5% goes towards a 'pool corpus', which is separately managed by the government. It is simply a provision to enhance the stability and sustainability of the entire pension scheme . This portion will not be paid to the subscriber on maturity. So the contributions under UPS total 20%, not 28.5%. Comparatively, NPS offers a higher direct contribution from the government at 14%, taking the total contributions to 24%.Two, the assured payout in UPS can reduce substantially in specific conditions. To qualify for the full 50% assured payout, the retiree's individual corpus must equal the UPS benchmark corpus upon retirement. Benchmark corpus is a notional value that acts as a reference point for evaluating whether a subscriber's total accumulated corpus at the time of retirement is sufficient. Even as subscribers are allowed to choose from different investment plans, the calculations assume that contributions are invested in the default pattern. Currently, the default pattern of NPS invests 85% in government and corporate bonds and 15% in equities. But subscribers have the choice of investing in a 100% government securities plan (for those seeking safety) as well as two lifecycle funds with equity exposure capped at 25% and 50% respectively (for those seeking higher return). Now, if based on your investment choices, the individual corpus at the time of superannuation is less than the benchmark corpus, the subscriber has two options: One, contribute additional funds to cover the difference to be eligible for the full 50% assured payout. Else, the payout will be reduced proportionately. So, if the individual corpus on superannuation is only 75% of the benchmark corpus, the retiree will receive only 75% of the 50% assured payout. This makes the choice of aggressive investment pattern risky. 'The employee bears the risk of shortfall arising from market conditions, investment choices or breaks in service,' observes Kulin Patel, CEO, KA Pandit Consultants and Actuaries. On the other hand, if the individual's corpus on superannuation exceeds the benchmark corpus, the surplus amount is returned to the subscriber as a lump sum payout, even as he gets the full 50% assured pension.Further, even as UPS guarantees minimum pension after 10 years of service, the benefits get reduced proportionately when service years are lesser than 25. For instance, an employee retiring after 25 years of service with last drawn annual basic pay of Rs.30 lakh would fetch the full Rs.15 lakh as guaranteed pension payout in the first year. But another employee retiring after 15 years of service at same pay will only earn Rs.9 lakh annual pension (50% x `30 lakh x 15/25). Besides, employees who are removed, dismissed, or who resign are not entitled to the assured payout.Saraogi says that individuals who are not wedded to their government job may lose out if enrolling with UPS. 'UPS does not provide a sweet deal if you put in lesser number of years in a government job. If you shift jobs midway, the pension amount will not be meaningful.' Sumit Shukla, CEO, Axis Pension Fund, says, 'If you want flexibility to shift career paths and move to a higher paying non government job, or seek early retirement, the UPS is a bad choice.' Additionally, payout benefits under UPS are capped at 25 years. Employees with qualifying service period of more than 25 years will not receive any additional payout for the years exceeding 25. Effectively, any service beyond 25 years is ignored.'If you want flexibility to shift career paths, or seek early retirement, UPS is a bad choice.'CEO, AXIS PENSION FUNDA 25-year-old retiring on NPS must earn 12.26% annualised return by age 60 to be able to match payouts from UPS if he lives until 90.Outsized returns from equity plans have propped up overall returns, but longer term outcomes have been modest.'People who are relying entirely on NPS for their retirement corpus and are likely to run a withdrawal rate higher than 4% should consider opting for the UPS.'FOUNDER AND PARTNER, BASUNIVESH FEE-ONLY FINANCIAL PLANNERSVoluntary retirement under the UPS is also very restrictive. An employee can opt for voluntary retirement only after completing 25 years of service. Further, the retiree can only receive the pay-out upon reaching the superannuation age. For example, an employee who joins service at 25 and voluntarily retires at 49 will have to wait for another 11 years to receive the pay-out.Three, your next of kin won't get full benefits in the UPS after your death, unlike in the NPS. 'In case of early demise of the subscriber, pension payout to spouse under the UPS falls to 60% of the guaranteed sum. If the spouse also dies, the pension stops altogether. Nothing flows to the children,' avers Raghaw. Effectively, an early death under UPS stops benefits of lifelong savings from flowing to loved ones. The UPS loses its allure when the individual's lifespan is shorter. Besides, unlike the OPS, the family pay-out under UPS cannot be claimed if the surviving spouse remarries after the death of the retiree.On the other hand, when a NPS subscriber dies before retirement, the entire accumulated corpus is paid to the nominee as a lump sum, if amount is less than or equal to Rs.5 lakh. If corpus is more than Rs.5 lakh, 80% of the corpus flows towards purchase of annuity and the rest is paid as lump sum to the nominee or legal heirs. If none of the dependent family members (spouse, mother or father) are alive, the 80% corpus has to be returned to the surviving children or legal heirs. After retirement, the default annuity scheme of NPS provides annuity for life with the option of return of purchase price. If the subscriber dies after opting for a joint life annuity, payout continues to the spouse until death. After the death of the spouse, the purchase price is returned to the surviving children of the subscriber, or legal heirs.The NPS offers several benefits and features that are missing in the UPS. Experts argue that the NPS allows a greater degree of choice, control and flexibility in investments and withdrawals. Even as UPS subscribers are restricted to three pension fund managers — UTI, SBI and LIC, NPS subscribers can choose from ten. To be sure, both UPS and NPS offer investment plans that allow government subscribers to park up to 50% in equities until a certain age. However, NPS lets subscribers continue to invest for longer and defer withdrawals. 'NPS lets you extend the accumulation phase up to age 75, allowing you to grow and compound the money for longer,' asserts Raghaw. Subscribers can exit from the NPS and initiate pension anytime during this extension.You can defer both lump sum withdrawal (for 10 years) and annuity payout (for 3 years). The NPS also permits subscribers to initiate an SWP (systematic withdrawal plan) from the accumulated corpus on retirement, instead of taking the lump sum payout. This lets you plan your regular income flow as per your requirement. NPS also allows more choices in annuities. 'NPS annuity plans come in multiple variants. Subscribers may opt for annuity without return of purchase or with return of purchase price. There is no such flexibility in UPS,' points out Raghaw.Under both UPS and NPS, employees are allowed to withdraw up to 60% of the total corpus as a lump sum on superannuation. However, this leads to a proportionate reduction in the assured monthly pension payout. Further, the 60% lump sum withdrawal is fully tax exempt under NPS. It is not yet clear if this tax exemption will be offered to UPS subscribers. Also, employer contributions under NPS are deductible from taxable income (even for those opting for new tax regime). But no such tax benefit is offered on UPS contributions.Lastly, early withdrawals are allowed under both NPS and UPS. Partial withdrawals up to 25% of self-contribution (excluding returns) are allowed under UPS after completion of lock-in period of three years from the date of enrolment under UPS or NPS, whichever is earlier, for specified purposes. A maximum of three such withdrawals are allowed until superannuation. However, early withdrawals under NPS are tax exempt. UPS subscribers await clarity on this.Those who seek predictability in cash flows and are not likely to move jobs will find retiring with UPS' guaranteed, rising pension more stress-free. Having assurance of an inflation-adjusted pension payout at 50% of your last drawn basic pay for the rest of your life is a mighty comfort that a market-linked vehicle like NPS simply cannot match. 'UPS is a safety-first approach built on certainty whereas NPS is built on a probabilistic approach with multiple unknowns,' insists Saraogi. Even so, the choice is not straightforward. Despite its appeal of assured pension, UPS has its shortcomings. Those planning a shorter stint or retiring early should stay away from the UPS. NPS offers an edge over UPS in flexibility and control. Tonagatti adds that the 60% lump sum payout in NPS, if deployed correctly, can be used to compensate for the low-yield annuity payouts. Additional investments beyond NPS will further provide for a higher retirement kitty. Make sure to evaluate your current savings, assess your post-retirement needs and risk tolerance to make the right choice.'In case of early demise of the subscriber, pension payout to spouse under the UPS falls to 60% of the guaranteed sum. If the spouse also dies, the pension stops altogether.'FOUNDER,PERSONALFINANCEPLAN.INAssured payout can reduce under three conditions