Retirement Planning: The central government recently announced the creation of the Unified Pension System (UPS). Prior to this, the main pension systems in India were the Old Pension System (OPS) and the National Pension System (NPS). The OPS was launched in 1924. When India became independent in 1947, the OPS continued to function. In 1998, the retirement age under the OPS was increased from 58 to 60 years.
The central government launched the NPS in 2004 for central government employees.
The scheme was extended to private sector employees and NRIs in 2009.
UPS is the latest addition to the history of pension schemes in India.
All three plans offer a monthly pension to their subscribers, but the amounts vary in each of them.
In this article, through the calculations of Krishan Mishra, CEO, FPSB India, we will tell you that an employee who is 42 years old and has an annual salary of Rs 900,000, with a basic salary of Rs 7,80,000 per annum for the next 18 years, would receive the monthly pension under OPS, NPS and UPS.
| SCHEME | DETAILS | ASSUMPTIONS | PENSION |
| Old pension system | The OPS is a defined benefit pension plan, which typically calculates the pension based on the last salary received and years of service. | Pension = 50% of the last basic salary received × years of service | The monthly pension would be approximately Rs 48,750/- |
| 780000/12=65,000 | |||
| So, 65000/2 x 18 = 585,000 per year | |||
| New pension plan | NPS is a defined contribution plan, where both the employee and the employer contribute a percentage of the employee’s basic salary. The pension depends on the accumulated capital and the amount used to purchase an annuity. | · Employee Contribution: 10% of basic salary (INR 78,000) | The monthly pension would be approximately Rs 18,400/- per month. |
| · Employer Contribution: 10% of Basic Salary (INR 78,000) (Assuming Government Employee Scenario) | |||
| · Return on investment: 8% per year | |||
| · Annuity rate: 6% at retirement | |||
| Body=P×[(1+r)t−1]÷r | |||
| Approximate corpus at the time of retirement = Rs 6.9 million | |||
| Monthly Pension: Assuming 40% of the corpus is used to purchase an annuity at 6%, then | |||
| Monthly pension = (6.9 × 40% × 6%) ÷ 12 = Rs 18,400 per month | |||
| Unified Pension System | The Unified Pension System (UPS) is an idea that aims to consolidate multiple pension systems, such as the Old Pension System (OPS) and the National Pension System (NPS), into a single framework, with the aim of harmonizing the best aspects of the OPS and NPS into a single system. | · Hybrid formula: A percentage of OPS pension combined with a contribution benefit similar to NPS. | a monthly pension of approximately Rs 29,000/-. |
| · Pension: 50% of OPS benefit + Annuity of a smaller corpus similar to NPS | |||
| Based on the above, a possible hybrid model combining elements of OPS and NPS could offer a monthly pension of around Rs 29,000, taking into account both a partial defined benefit and a contribution-based annuity. | |||
Chart courtesy of Krishan Mishra, CEO, FPSB India
Explaining the three scenarios, Mishra said, “Under the Old Pension Scheme (OPS), which is a defined benefit scheme, the individual is likely to get an annual pension of about Rs 5,85,000, which translates into a monthly pension of around Rs 48,750, assuming he retires at the age of 60.”
On NPS pension, he said, “The New Pension Scheme (NPS), being a defined contribution scheme, would provide a monthly pension of around Rs 18,400. This figure is based on an estimated principal of Rs 6.9 crore accumulated over 18 years, assuming an annual return of 8 per cent and an annuity rate of 6 per cent at the time of retirement. Depending on market performance and the type of fund chosen (growth, balanced or debt fund), the rate of return can be much higher.”
Describing the monthly pension under UPS, he said, “The Unified Pension System (UPS) offers a potential hybrid model combining elements of OPS and NPS offering a monthly pension of about Rs 29,000, taking into account both a partial defined benefit and a contribution-based annuity.
Mishra is of the view that “The Unified Pension System (UPS) represents a progressive approach to pension reform by combining the stability of the Legacy Pension System (LPS) with the flexibility of the National Pension System (NPS). By offering a hybrid model, the UPS aims to provide a secure income after retirement while limiting the fiscal impact on the government. It simplifies pension management, ensuring uniform benefits across sectors.”
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