Switch to UPS from NPS: 5 Questions Government Employees Should Ask Before Opting for the Unified Pension Plan

The introduction of the Unified Pension Plan (UPS) in August 2024 has created an interesting situation for power plants government employees. Universal Postal Union It is a hybrid scheme that incorporates the contribution element of the National Pension System (NPS) and pension insured by the Old pension plan (OPS). However, UPS requires a more detailed evaluation and deeper understanding of the nuances before making an informed decision.

Government employees currently receiving NPS are at a critical juncture as it is imperative for them to decide which is the best pension option between NPS and UPS. This article, while not intended to serve as criticism or praise of UPS, is intended to encourage government employees to ask themselves the following questions before making a decision. switch to UPS from NPS:

Also read: How you can calculate the UPS pension, the UPS family pension

Question 1: About active participation in portfolio management
UPS ensures a pension indexed to inflation of 50% of the average salary of the last 12 months. This was a long-pending demand of a large section of government employees covered under the NPS. UPS transfers the risk of the investment from the employee to the employer. NPS, on the other hand, allows government employees to manage their contributions according to their risk profile. This allows them to actively participate in the way the fund manager manages their money in the NPS scheme.Will the government allow employees to actively participate in the management of their portfolio or be passive beneficiaries of a pension insured under the UPS?

Question 2: About a lower lump sum upon retirement at UPS
Under UPS, employees would receive a much smaller lump sum on retirement than the General Provident Fund (GPF) in OPS and 60% of the corpus in NPS. Remember, there is no GPF for government employees covered by the NPS. According to UPS, an employee who has been in government service for 35 years will receive just 7 months of salary upon retirement. This seems grossly insufficient. This lump sum will not reduce the pension amount under UPS.
On the other hand, OPS used to offer a lump sum GPF and the option to commute the pension. This used to result in huge lump sums at retirement. However, pension commutation will reduce the pension payable to public employees upon retirement. The original pension would be restored after 15 years of expiration of the commutation.

Under the NPS, a government employee can withdraw 60% of his retirement corpus as a lump sum. However, this may result in lower pensions for public employees upon retirement. This is because 40% of the NPS corpus has to be mandatorily used to purchase an annuity.

Most employees use the lump sum received upon retirement to build capital assets or meet unexpected emergencies during the retirement period.

Is the employee willing to give up this option? Can government employees overcome the mental block of an assured pension versus the possibility of a higher-yielding NPS portfolio?

From a tax point of view, in the current situation – although greater clarity is expected – the global amounts of OPS and NPS are covered by the EEA regime, while there is no clarity regarding the taxation of the global amount received under UPS. This may result in a lower payment. Employees have to see if they are willing to accept this blow.

Question 3: Increasing future employee contribution
In the case of UPS, employee and government contributions amount to 10% and 18.5%, respectively. The government contribution would be reassessed every 3 years starting April 1, 2025.

Is there a possibility of increasing employee contributions in the future? The government must provide clarity on this.

Question 4: About the option of switching to UPS in the future
Any changes to the UPS terms in the future (if introduced by the government) could make the scheme more attractive.

Would employees who had opted for NPS during their years of service be given the option to switch to UPS? Is there a time limit for government employees to switch from NPS to UPS? Also, will there be an option to switch from UPS to NPS before you retire?

Question 5: About transparency in UPS fund management
As stated by the government, UPS would benefit more than 99% of government employees. If government employees choose to switch from NPS to UPS, their NPS corpus will be added to the government fund. This nationalization of pension assets would result in a rich dividend for the government.

Would there be transparency in the deployment of this acquired fund?

The government has done its bit by offering UPS as an alternative to the NPS. NPS performance is tied to the market, meaning it cannot be stated with certainty. However, empirical data (NPS performance since inception, annuity assumption, etc.) does act as a criterion. For more conservative employees, UPS in its current form would serve that purpose.
This decision is certainly not easy and the situation must be examined from all possible directions. After all, this is income in a person’s hands during the non-income-generating part of life. Without a doubt, it is one of the key decisions for any worker, so it is better that you are informed.

(The article was written by Sarika Bhatnagar, Associate Professor, Lakshmibai College, University of Delhi.)