Introduction
The rules for the Unified Pension Scheme (UPS) were unveiled on January 25, 2025, and will take effect on April 1, 2025. Government employees will now be required to choose between the existing National Pension Scheme (NPS) and the newly introduced UPS. This blog will examine which option is more advantageous for a young government employee at the onset of their career.
Understanding NPS and UPS
NPS - Established in 2004, the National Pension System is familiar to most government employees, especially the younger demographic. For a quick review, the primary features are as follows:
An employee's contribution of 10% and a government contribution of 14% are both credited to the employee's individual corpus.
Employees maintain authority over the asset allocation of the corpus and can choose to manage the distribution between equity and debt (Active Choice) or opt for one of the three predefined patterns (Auto Choice).
The corpus appreciates over time based on equity returns (stock market performance) and bond returns (interest rate fluctuations).
Upon retirement, the corpus can be withdrawn tax-free, with 60% available as a lump sum and 40% required to be invested in an annuity.
UPS - Similar to NPS, both the employee's contribution (10%) and the government's contribution (10% in this instance, compared to 14% in NPS) are credited to the employee's individual corpus. Additionally, the government contributes 8.5% to its own corpus, which will be used to support guaranteed payouts under UPS. This government corpus is managed and invested by the government, and the employee does not have control over it.
Furthermore, the concept of a benchmark corpus has been introduced. The benchmark corpus represents the expected value of the employee's individual corpus, based on the employee's salary, qualifying service, a minimum of 10% employee contributions, 10% government contributions, no partial withdrawals and a "default pattern of investment."
While the "default pattern" has not yet been defined, it is anticipated to be identical to the "moderate life cycle" option in the Auto Choice mode of the current NPS. In this default pattern, equity allocation is set at 50% until the age of 35 and decreases by 10% every five years until the age of 60.
Differences:
NPS - The retirement pension is linked to the performance of equity and bond markets during the accumulation phase, market value of corpus at the time of retirement, and annuity rates at the time of retirement.
UPS - Although the individual corpus remains market-linked, the retirement pension is assured at 50% of the average basic salary received in the last 12 months prior to retirement. This guarantee is conditional upon the individual corpus matching the benchmark corpus; otherwise, the pension will be proportionately reduced. If the individual corpus is higher than the benchmark corpus, the difference is credited to the employee's bank account.
Similarities:
Both require contribution by employee at 10% of (Basic + DA)
UPS is still market-linked. The guaranteed pension of 50% would only be paid if individual corpus equals the benchmark corpus, else it would be proportionately decreased.
Calculation of Potential Income During Retirement
Assumptions used in the calculation:
Current age is 25 and retirement age is 60
With a life expectancy of 80, the corpus must provide monthly income for 20 years post-retirement.
The employee consistently contributes 10% of their salary each month, with no missed contributions.
No partial withdrawals are made by the employee during retirement.
The employee selects an active investment strategy, comprising 70% equity and 30% debt, until retirement in both NPS and UPS. The rate of return on this active strategy until retirement is 9.80%.
The rate of return on UPS Benchmark Corpus is 8.26%
The current monthly salary consists of Rs.35,000 (Basic) plus Rs.18,550 (DA at 53%). Every year, there is an increment of 3% on basic and 6% increase in DA
Throughout the career, the employee receives 5 promotions, each resulting in a 20% increase in basic pay.
A new Pay Commission is implemented every 10 years, doubling the basic pay.
The rate of return on the corpus after retirement is 9%.
The rate of return on the NPS annuity is 7%.
Using the above assumptions, the retirement corpus and potential income for the employee are as follows:
NPS:
Corpus of Rs.25.82 Crores
Monthly income of Rs.19.96 Lakhs
UPS:
Individual Corpus of Rs.21.51 Crores
Benchmark Corpus of Rs.17.45 Crores
Monthly income of Rs.18.24 Lakhs
Scroll down to view and download the retirement calculator.
Conclusion
For early-stage government employees, the National Pension System (NPS) is more advantageous, as the potential monthly income is higher. This is due to a larger individual corpus in NPS, as government contributions are 14% compared to 10% in UPS.
Download Retirement Income Calculator
Disclaimer for Using the Calculator:
The assumptions applied have been crafted to be as realistic and accurate as possible; however, they may be subject to change due to evolving market conditions or regulatory updates.
You are welcome to download the sheet and modify the assumptions to create your own model. Please note that this sheet is specifically designed for a 25-year-old employee. All other inputs are adjustable.
The model presumes that the Individual Corpus will match the Benchmark Corpus at the time of retirement. This is generally expected to be the case, barring any missed payments or early partial withdrawals.
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