UPS offers a guaranteed pension for life and 60% of it for your spouse. NPS, on the other hand, allows you to withdraw 60% of the corpus as a tax-free lump sum and invest the remaining 40% into an annuity to receive a pension. You are free to invest the lump sum wherever you want to generate regular income.
Which system is better? Let’s explore the nuances to find out.
How UPS works
In UPS, 20% of your basic pay + dearness allowance (DA) goes into creating your corpus. You contribute 10% and the government matches it. The government also contributes 8.5% to the pool corpus that’s used to ensure a guaranteed pension. In NPS, while the employee contribution is the same (10%), the government contributes 14%, raising the total to 24%.
But where will your contributions be invested? NPS and UPS both offer four investment choices. In the default option, equity exposure is limited to 15% (this is now being hiked to 25%) and the rest is put in fixed-income instruments. The other three choices are 100% in government securities; lifecycle-50 with 50% equity exposure, and lifecycle-25 with 25% equity exposure.
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You also need to understand what individual and benchmark corpuses are. The individual corpus belongs to you and is grown by putting 20% of your basic pay + DA in one of the four investment choices. The benchmark corpus is the corpus accrued via the Pension Fund Regulatory and Development Authority’s (PFRDA’s) default investment pattern.
If the individual corpus is less than the benchmark corpus at the time of superannuation, you will have to deposit the balance to get the maximum pension. If not, the pension will be reduced proportionately. If the individual corpus is more than the benchmark corpus, the balance will be transferred to your bank account and you will receive the maximum pension as per your last drawn basic salary + DA.
Pension amount in UPS
You need to complete at least 10 years of service to be eligible for the minimum guaranteed pension in UPS, which is ₹10,000. It could be higher depending on your last drawn basic salary + DA. You get the maximum pension, which is 50% of the last 12-month average basic pay + DA, if your service period is more than 25 years. This pension amount will be adjusted for inflation. Your spouse will be eligible for 60% of the pension amount after you pass away. However, if you marry after superannuation, your spouse won’t be eligible for it.
Apart from a pension, you will also be eligible for a lump sum payout amounting to 10% of the basic pay and DA for every six months of service. You will also have the option to withdraw 60% of your individual corpus, but doing this will reduce your guaranteed pension.
If you retire early, your pension will still start at the age of actual superannuation, not immediately.
NPS vs UPS
Suppose your monthly basic pay + DA is ₹50,000, and it increases by 5% every year. You have been in service for 25 years. Your 12-month average basic + DA when you retire will be ₹1.69 lakh, so your pension under UPS will be 50% of this, or ₹84,658. The lump sum payout will be ₹8.45 lakh ( ₹1.69 lakh/10*50).
In NPS, the total corpus at retirement will be ₹2.25 crore, assuming a compound annual growth rate (CAGR) of 10%. The lump sum available will be ₹1.25 crore (60% of ₹2.25 crore). At a sustainable withdrawal rate of 3%, the monthly payout will be 33,750. Also, 40% of ₹2.25 crore is ₹90 lakh. If you buy a joint life annuity at a 7% interest rate, the annuity per month will be ₹52,500. This means your total NPS pension will be ₹86,250.
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The example shows that NPS and UPS will give you nearly the same pension if your service period is 25 years. Since UPS is inflation-linked and guaranteed, it may work better for most people.
“UPS inserts certainty into an otherwise uncertain future through a defined benefit plan, as opposed to the uncertain, investment return-based defined contribution plan under NPS. No wonder most government employees would choose the former over the latter,” said Abhishek Kumar of SahajMoney, a Sebi-registered investment advisor in Delhi.
How service period affects your pension
However, if your service period turns is more than 25 years – say, 30 or 35 years – the NPS corpus could be enough for you to draw the same pension as in UPS and yet have funds left over at the end. This is because the UPS pension formula caps the service period at 25 years even if it is higher.
What about a shorter service period? The pension under UPS will only start at your actual retirement age. The pension formula, however, will take into account your last drawn basic + DA. It will not be adjusted against inflation. Once the pension starts, it will get the inflation benefit.
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Under NPS, if you retire early, 80% of the corpus will be available to you immediately and 20% can be used to buy an annuity for an immediate pension. While the NPS corpus may not last lifetime, the total benefit from it could still be higher than from UPS since pension from the latter is not adjusted for inflation and is deferred to the age of superannuation.
If you are someone who does not stick to one job, UPS may be challenging. It is unclear if UPS will continue if you are transferred to a state government job or to a public sector undertaking (PSU). The rules do say that if you resign from your services, UPS benefits will cease to apply. NPS on the other hand gives you flexibility. Your NPS account continues whether you move to a private job, a different government job, or become self-employed.
