Key Points to Reflect On
- What is the Unified Pension Scheme (UPS), and how does its implementation serve as a balanced solution to reconcile the financial sustainability concerns of the government with the retirement security needs of employees?
- After 25 years of service with a constant basic pay of ₹100,000, you could receive a lump sum of ₹72.83 lakhs under OPS, ₹2.214 crores under NPS, or ₹1.923 crores under UPS. So, why are employees still clamoring for the Old Pension Scheme? Uncover the surprising reasons in this article.
- If employees are so eager to return to the Old Pension Scheme, what’s holding the government back? Discover the hidden challenges and limitations that make reviving OPS a complex dilemma.
I don’t need a pension because I want to:
- Depend on my children for financial support, straining their resources and family relationships.
- Face severe financial hardship, struggling to meet basic needs like food and housing.
- Spend up to 60% of my income on medical expenses, leading to neglected treatments and worsening health.
- Risk exploitation and fraud due to financial insecurity.
- Experience social isolation and a loss of dignity, affecting my mental health and well-being.
Now that you understand the significance of this topic and its widespread discussion, explore the comprehensive details and financial implications of pension schemes through the following sections:
- Overview of Pension Schemes : In this section, we delve into the specifics of existing pension schemes, including the Old Pension Scheme (OPS) and the National Pension Scheme (NPS). We also introduce the newly announced Unified Pension Scheme (UPS), highlighting its features and comparing it to previous schemes.
- Pension and Payout Analysis : Here, we provide detailed calculations to illustrate the financial aspects of each scheme. This includes an in-depth analysis of lump sum payouts and monthly pensions, helping you understand the practical financial outcomes under different scenarios.
OLD PENSION SCHEME
The Old Pension Scheme (OPS) was introduced to provide government employees with a secure and predictable retirement income. It was designed as a defined benefit pension plan, where the pension amount is guaranteed and based on the employee’s last drawn salary and years of service.
Why It Was Introduced:
- Financial Security: The OPS aimed to ensure that government employees had a stable source of income after retirement, reducing financial uncertainty during their post-working years.
- Employee Welfare: It was part of a broader strategy to attract and retain talent in government jobs by offering attractive retirement benefits.
Fund Contributions:
- Employee Contributions: Under the Gross Provident Fund (GPF), employees contribute a portion of their salary—typically between 6% and 8% to build up a retirement corpus. This fund accumulates with annual interest added by the government. Upon retirement, employees receive the total accumulated amount, including interest, as a lump sum.
- Government’s Responsibility: Unlike other pension schemes, the Old Pension Scheme (OPS) required no contributions from employees during their working years. Instead, the government fully funded the pensions, directly paying them from its revenue, making it a significant financial burden for the state.
NATIONAL PENSION SCHEME
The New Pension Scheme (NPS) was introduced by the Government of India in 2004 to replace the Old Pension Scheme for new government employees. The NPS is a defined contribution pension plan designed to provide employees with a more sustainable and flexible retirement savings option.
Why It Was Introduced:
- Financial Sustainability: The NPS was introduced to address the growing financial burden of the Old Pension Scheme on the government. By requiring employee contributions, the NPS shifts some of the retirement savings responsibility to the employees themselves.
- Market-Linked Returns: The NPS offers the potential for higher returns by investing contributions in a mix of equities, government bonds, and corporate bonds. This market-linked approach aims to grow the retirement corpus over time.
Fund Contributions:
- Hybrid model: Both the employee and employer contribute to the NPS, with the employee typically contributing 10% of their basic salary plus dearness allowance, while the employer can contribute 10-14%.
- Investment Options: The NPS lets employees choose their investment mix across asset classes like equities, bonds, and government securities, with options to select fund managers or use an auto-choice that adjusts with age.
- Pension Corpus: At retirement, the accumulated corpus is used to purchase an annuity, which provides a regular pension. Employees can withdraw up to 60% of the corpus as a lump sum, with the remaining 40% mandatorily invested in an annuity.
UNIFIED PENSION SCHEME
The Unified Pension Scheme (UPS) is designed to merge elements of both the Old Pension Scheme (OPS) and the New Pension Scheme (NPS), providing a balanced approach to retirement savings.
Why It Is Introduced:
- Balancing Security and Flexibility: The UPS aims to address the shortcomings of both the OPS and NPS. It provides a guaranteed pension component similar to the OPS while incorporating the market-linked returns and contribution-based flexibility of the NPS.
- Comprehensive Coverage: The UPS is created to offer a more inclusive and adaptable pension system, ensuring a secure retirement for a broader range of employees.
Fund Contributions:
- Hybrid Model: Employee typically contributing 10% of their basic salary plus dearness allowance, while the employer contribute18.5%.
- Assured Pension: Retirees with 25 years of service receive 50% of the average basic pay from the last 12 months. For 10 to 24 years of service, the pension is proportionately reduced, with a minimum assured pension of ₹10,000 per month for those completing at least 10 years.
Detailed Analysis of how Unified pension scheme will work:
Pension corpus to be divided into two funds:
- An individual pension fund with – 10% (Basic pay + DA) contribution from both employee and government.
- Separate pool with additional 8.5% contribution (8.5% of basic and DA) by government alone.
Options available to employee at the time of retirement:
- The employee will get a lumpsum amount which will be 1/10th of monthly emoluments (pay + DA) on the date of superannuation for every six months of completed service. Besides this, the employee can withdraw up to 60% of the individual pension corpus with proportionate reduction in assured pension. This feature is similar to the national pension scheme but you get additional lumpsum payment which is equal to 1/10th of monthly emoluments.
- As per notification of PFRDA (Pension Fund Regulatory and Development authority), Assured pension will be based on default mode. Under Default mode, funds are allocated among three PSUs fund managers which are SBI Pension funds, UTI Retirement Solutions and LIC pension funds ltd. 85% of the funds will be invested in fixed income instruments and 15% in equity and related instruments.
- In case the individual corpus generates higher than assured annuity, the employee will be entitled to such higher annuity. In case the return is lower than assured annuity, the top up provided by the government through UPS will be limited to the annuity assured.
By systematically analyzing and comparing the three principal pension schemes based on specific criteria and real-life examples, we can gain a clearer understanding of how each scheme operates and their distinct mechanisms. For making comparisons between pension schemes we will be making some realistic assumptions.
Assumptions for the analysis.
- Basic Pay: The basic pay of the employee is fixed at ₹100,000 per month, assumed to remain constant throughout the entire employment period.
- Tenure: The employee has a continuous service duration of 25 years.
- Rate of Return: The average market rate of return generated by pension fund managers during this period is assumed to be 9.5% annually. Historically, pension fund managers have also generated 9.5% since its inception.
- Annuity Investment: Investments made in an annuity are expected to yield a return of 7%.
- GPF Interest Rate: The average interest rate offered by the government under Gross Provident Fund (GPF) is considered to be 8.5% per annum.
- Employee Contribution: Under the Old Pension Scheme (OPS), the employee contributes 7% of their salary to the General Provident Fund (GPF).
- Dearness Allowance (DA): The Dearness Allowance is set at 58%, adjusted as of April 2025.
- DA Revisions: Given the frequent revisions of the DA over time, a constant DA rate of 25% has been assumed for the past 25 years for analytical purposes, recognizing that individual adjustments have not been accounted for in this analysis.
Know the exact returns provided by pension fund managers.
Know exact GPF rate of interest.
Criteria 01: Lump Sum Amount at the Time of Retirement
Upon retirement, the financial benefits typically consist of several key components. These include a lump sum amount, a regular pension, and additional benefits such as gratuity and earned leave encashment.
Old pension scheme (OPS): The lump sum payment at retirement consists of the total amount accumulated in the Gross Provident Fund (GPF). This includes the employee’s contributions, which typically range from 6-8% of their salary, and the interest earned over the years. Upon retirement, the employee receives this entire accumulated amount as a one-time payment. this entire lump sum payment is exempt from income tax.
| Monthly amount contributed to GPF (7%*100,000) | 7,000 |
| Yearly amount contributed to GPF (12*Monthly amount) | 84,000 |
| Interest rate applied to the fund contributed to GPF | 8.5% |
| No. of years worked by employee under this scheme | 25 Years |
| Lumpsum Amount received at the end of employment | 72.83 lakhs |
National pension scheme (NPS): Upon reaching the age of 60, a subscriber can withdraw up to 60% of the accumulated corpus as a lump sum, which is tax-free. The remaining 40% must be used to purchase an annuity, which provides a regular pension income. In the case of premature exit, 80% of the corpus must be used for annuity purchase, with the remaining 20% available for withdrawal.
| Employee’s Basic pay | 100,000 |
| DA Allowance (25% assumed over the time period) | 25,000 |
| Employee’s contribution in the Fund (10% of basic salary) | 12,500 |
| Employer’s contribution in the fund (14% of basic salary) | 17,500 |
| Total monthly contribution in the fund (Adding above two) | 30,000 |
| Total Annual contribution in the fund (12*Sum of cont.) | 360,000 |
| No. of years worked by employees under this scheme | 25 years |
| Assumed Market rate of return | 9.5% |
| Total compounded amount at the end of 25 years | 36,891,517 |
| Lumpsum amount received (at max 60% of total amt) | 2.214 crores |
Unified pension scheme (UPS): At retirement under UPS, you will receive a lump sum payment at superannuation along with gratuity. This lump sum amount will be 1/10th of your monthly emoluments (pay + DA) on the date of superannuation for every six months of completed service. This payment will not reduce the assured pension amount.
Note: The feature of withdrawing 60% of individual corpus at the time of retirement is also applicable in UPS. This withdrawal is accompanied by a proportionate reduction in the assured pension amount. The amount (1/10th of monthly emoluments) is additional.
Scenario 01: No withdrawal out of individual corpus.
| Last drawn salary by the employee | 100,000 |
| Dearness allowance (58%) | 58,000 |
| 10% of sum of above two. (10%*158,000) | 15,800 |
| No. of years worked by the employee | 25 years |
| No. of every 6 months of completed service. (25*2) | 50 |
| Lumpsum amount received by employee (50*15800) | 7.9 lakhs |
Note: It is assumed that the employee will retire in April,2025. DA rate is subject to periodic revision by the government and may change over time.
Scenario 02: 60% withdrawal out of individual corpus.
| Employee’s contribution in the Fund (10% of basic salary) | 12,500 |
| Employer’s contribution in the fund (10% of basic salary) | 12,500 |
| Total monthly contribution in the fund (Add above two) | 25,000 |
| Total Annual contribution in the fund (12*Sum of cont.) | 300,000 |
| No. of years worked by employees under this scheme | 25 years |
| Assumed Market rate of return | 9.5% |
| Total compounded amount at the end of 25 years | 30,742,930 |
| Lumpsum amount received (at max 60% of total amt) | 18,445,758 |
| Additional amount received by the employee | 790,000 |
| Total Lumpsum amount received by employee | 1.923 crores |
Both NPS and UPS offer substantial lump sum payouts, with NPS at ₹2.214 crores and UPS at ₹1.923 crores, significantly outpacing the ₹72.83 lakhs from OPS.
Concept clarity:
When comparing lump-sum amounts, the Old Pension Scheme (OPS) may seem less appealing due to its lower contributions. This is primarily because OPS lacks employer contributions, and the employee’s contribution is also minimal. As you’ve probably gathered by now, the cash in hand component is higher in OPS and the entire pension is funded by the government and, whereas the larger lump-sum amounts in the National Pension System (NPS) and other schemes are due to higher contributions. Additionally, in OPS, withdrawing a lump sum doesn’t affect your monthly pension, unlike NPS and other schemes, where such withdrawals do impact your pension payouts.
Criteria 02: Monthly Pension Amount After Retirement
Old pension scheme (OPS): The pension under the OPS is typically calculated as 50% of the employee’s last drawn Basic Pay plus Dearness Allowance (DA).
| Last drawn salary by the employee | 100,000 |
| 50% of the last drawn salary by employee | 50,000 |
| Dearness allowance at the rate of 58% | 29,000 |
| Monthly pension received by the employee | 79,000 |
Note: It is assumed that the employee will retire in April,2025. DA rate is subject to periodic revision by the government and may change over time.
National pension scheme (NPS): At the time of retirement, you will need to use at least 40% of your corpus to purchase an annuity. The amount of your monthly pension will depend on the annuity plan you choose, the annuity provider, and the prevailing interest rates.
| Last drawn salary by the employee | 100,000 |
| 50% of the last drawn salary by employee | 50,000 |
| Dearness allowance at the rate of 58% | 29,000 |
| Monthly pension received by the employee | 86,914 |
Unified pension scheme (UPS): If employees work for 25 years or more, employees will receive 50% of average pay for the preceding 12 months as a pension, adjusted for inflation through dearness allowance. For shorter service periods, pensions will be proportionate, with a minimum of 10 years of service. A pension of 10,000 per month will be given after a minimum of 10 years of service.
| Avg. salary drawn of last 12 months | 100,000 |
| 50% of the last drawn salary by employee | 50,000 |
| Dearness allowance at the rate of 58% | 29,000 |
| Monthly pension received by the employee | 79,000 |
Note: It is assumed that the employee will retire in April,2025. DA rate is subject to periodic revision by the government and may change over time.
The old pension scheme and the new universal pension scheme offer 79,000, while the National Pension System tantalizingly edges ahead with 87,000.
Concept clarity:
According to the calculations, the National Pension System (NPS) may seem attractive due to its potential for higher returns. However, it’s crucial to understand that the NPS is market-dependent. While you could earn more if the market performs well, your pension income could decrease if it does not. In contrast, the OPS provides a fixed pension amount guaranteed by the government, ensuring stability. The UPS offers a guaranteed minimum monthly pension, with the potential for higher benefits if the market performs well.
Some other Important criteria.
| Criteria | Old pension scheme (OPS) | National pension scheme (NPS) | Unified pension scheme (UPS) |
|---|---|---|---|
| Family pension | Continued pension benefits to the family after retiree’s death. | Depends on accumulated corpus and annuity plans at retirement | 60% of the employee’s pension upon their death |
| Employee contribution | None. Government bears the entire cost | 10% of the basic salary | 10% of the basic salary |
| Government contribution | Entire cost borne by the government | 14% of the basic salary | 18.5% of the basic salary |
| Inflation indexation | Pension amount increases with Dearness allowance hikes. | Not possible; pension is determined by market returns. | Yes, based on All India consumer price index for industrial workers (AICPI-IW). |
| Assured pension | Yes, fully assured by government. | No, depends on the rate of return of the fund in which corpus was invested | Yes, 50% of the last 12 months’ average basic pay. Assured 10000 in case employees work for at least 10 years. |
| Minimum no. of years to receive pension | Minimum 10 years of service. For full pension benefits, a total of 20 years | Minimum 3 years of lock-in period. | Minimum 10 years of service. For full pension benefits, a total of 25 years. |
Conclusion:
When it comes to planning for retirement, understanding the different pension options is crucial. Each pension scheme—whether it’s the Old Pension Scheme (OPS), National Pension System (NPS), or the Unified Pension Scheme (UPS)—has its own set of advantages and disadvantages. The right choice depends on your personal risk appetite and financial goals.
Our aim is to provide you with realistic data and detailed analysis so you can make informed decisions. While higher risks can lead to greater returns, finding the right balance is key to securing your financial future.
From the government’s perspective, reverting to the Old Pension Scheme (OPS) could pose significant fiscal challenges. A Reserve Bank of India study indicates that such a shift could impose a financial burden on states up to 4.5 times higher than the National Pension Scheme (NPS). By 2050, OPS pension outgo is projected to exceed Rs 17 lakh crore, compared to Rs 4 lakh crore under NPS. This highlights the need to carefully weigh pension options not only for personal financial planning but also for broader fiscal sustainability.
Frequently Asked Questions
The TV Somanathan committee, set up in April 2023, formulated the Unified Pension Scheme (UPS). It retains key aspects of the National Pension System (NPS) implemented in January 2004.
Over 23 lakh central government employees are expected to benefit from the assured pension.
The estimated cost to the government in the first year of implementing UPS is around Rs 6,250 crore, with an additional Rs 800 crore for arrears of retired employees since 2004.
Maharashtra was the first state to approve the central government’s Unified Pension Scheme (UPS), within 24 hours of the announcement.
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