Unified Pension Scheme: How much pension, tax details and how it stacks up against NPS and OPS

Government employees who choose the Centre’s Unified Pension Scheme (UPS) introduced on August 24 can expect a significant increase in their pension payments.

The government’s contribution under the UPS will rise to 18.5% from the current 14%, leading to a projected 19% increase in pensions for employees with a starting salary of Rs 50,000, according to a TOI report based on UTI Pension Fund calculations.

The UPS, set to take effect on April 1, 2025, guarantees a pension equivalent to 50% of the average basic pay drawn over the last 12 months before retirement. Employees with 25 years of service will receive this full amount, while those with at least 10 years of service will get a proportionate pension, with a minimum guaranteed amount of Rs 10,000.

According to projections, employees who start their careers at age 25 and serve for 35 years could see significant differences in their retirement benefits under UPS and NPS. For instance, under the UPS, such an employee would accumulate a pension corpus of approximately ₹4.26 crore, leading to a monthly pension of ₹2.13 lakh. In contrast, the same employee under NPS would accumulate a corpus of ₹3.59 crore and receive a monthly pension of ₹1.79 lakh.

The superior outcomes under UPS are largely attributed to the higher government contribution rate of 18.5%, compared to 14% under NPS. Additionally, the UPS guarantees an assured pension that is more favorable, especially for those with long service periods. Even for employees who start at age 35 and retire after 25 years of service, UPS still offers a higher monthly pension of ₹84,787, compared to ₹71,400 under NPS. These projections assume an 8% annual growth in the fund and a 6% annuity return, highlighting the financial advantages that UPS could bring to government employees as they plan for their retirement.

Under the UPS, the pension corpus will be split into two funds:

• An individual pension fund, where the employee's contribution of 10% of basic pay and dearness allowance (DA) and the matching government contribution will be credited.
• A separate pooled corpus, which consists of an additional 8.5% government contribution based on the basic pay and DA of all employees.

Employees can choose how to invest their individual pension corpus, but the assured pension will be based on a ‘default mode’ investment pattern as notified by the Pension Fund Regulatory and Development Authority (PFRDA). Employees can withdraw up to 60% of their individual pension corpus, which will reduce their assured pension proportionately.

If the employee’s chosen investment generates an annuity higher than the assured amount, they will receive the higher payout. Conversely, if the investment yields a lower annuity, the government will make up the difference, but only up to the benchmark annuity level.

The full assured pension is available for those who have completed 25 years of service, with a pro-rata pension provided for those with at least 10 years of service. Employees have the option to choose between the UPS and the existing New Pension Scheme (NPS).

NPS or UPS, what is better?

Experts are divided on whether employees should switch from NPS to UPS. Dhirendra Kumar, CEO of Value Research, in a Moneycontrol report has advised those with many years until retirement to stick with the existing NPS for equity market returns. Suresh Sadagopan, CEO of Ladder7 Wealth Planners, in the same report, highlights the strong appeal of UPS’s guaranteed income, suggesting that eligible NPS subscribers consider shifting to UPS to secure their basic post-retirement lifestyle.

Unlike the Old Pension Scheme (OPS), where employees made no contributions, UPS requires employees to contribute 10% of their basic salary and DA, while the government contributes 18.5%. A portion of the government's contribution (8.5%) goes into a guarantee reserve fund to manage any shortfalls.

What about taxation?

The tax implications of UPS are yet to be clarified. Pension income under UPS is expected to be taxed at income-tax rates, similar to NPS, which allows for a tax-free lump sum withdrawal of 60% of the corpus. The UPS also includes a provision for a lump sum payment based on service length, but the tax treatment of this payment remains unclear.

With the option to choose between UPS and NPS, the government is expected to provide further guidance to help employees make informed decisions. Piyush Gupta, Director at CRISIL Market Intelligence and Analytics, suggests that younger employees might benefit from staying with NPS due to its potential for higher long-term returns, while senior employees nearing retirement may find UPS more attractive due to its guaranteed pension benefits.

Difference between UPS, NPS, and OPS

UPS: Only for government employees. Guarantees a pension equivalent to 50% of the average basic salary of the last 12 months. Requires employee contributions of 10% of basic salary plus DA, with the government contributing 18.5%. Includes a separate pooled corpus funded by an additional 8.5% government contribution.

NPS: Available to both government and private sector employees. No guaranteed pension; pension depends on market returns. Employees contribute 10% of their salary, and the government contributes 14%. Allows up to 60% tax-free lump sum withdrawal at retirement.

OPS: Was for government sector employees. Provided a guaranteed pension based on 50% of the last drawn basic salary, with no employee contributions. The government fully funded the pension without requiring investments in market-linked products.