The central government will introduce the Unified Pension System (UPS) from 1 April 2025, as an alternative to the National Pension System (NPS). Should employees who are currently on the SPU continue with it or switch to the SPU?
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UPS merges elements of defined contribution and defined benefit. Employees contribute 10 per cent of their basic salary plus dearness allowance (DA), while the government contributes 18.5 per cent of their basic salary plus DA. The government makes a higher contribution in UPS (18.5 per cent) than in NPS (14 per cent).
Advantages: UPS guarantees a pension equal to 50 per cent of the last salary earned, based on the average of the last 12 months. “It is an assured pension plan and does not leave the outcome to the whims of market forces,” says Jinal Mehta, founder of Beyond Learning Finance. In doing so, it addresses a key concern that government employees enrolled in the NPS had.
Mehta notes that government employees must have completed a minimum of 10 years of service to qualify for UPS.
Cons: In NPS, employees can have higher equity exposure, which creates the potential for higher returns over time. “This could be advantageous for employees who are not comfortable with risk, as they could benefit from market upturns,” says Vishal Dhawan, founder and chief executive officer (CEO) of Plan Ahead Wealth Advisors.
An employee must have completed 10 years of service to be eligible for UPS. Those who retire earlier will not qualify.
Currently, central government employees are eligible for UPS. Among the states, only Maharashtra has agreed to adopt it so far. “Currently, only a limited number of employees are eligible for UPS,” says Arnav Pandya, founder of Moneyeduschool.
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Under the NPS, employees contribute 10 per cent of their salary, while the government contributes 14 per cent. The money is invested in stocks, government securities and corporate bonds. On retirement, 40 per cent of the equity capital has to be converted into an annuity.
Advantages: Its biggest advantage is the potential to accumulate a larger volume of assets through greater equity exposure. “Employees also have the flexibility to choose their allocation across the three asset classes,” says Pandya.
Disadvantages: The employee bears the risk. “If the invested funds do not perform well, the employee bears the consequences,” says Pandya. The sheer number of options can also be overwhelming for some people.
In addition, 40 percent of the capital at retirement must be annuitized, which reduces flexibility.
How should you decide?
People who are comfortable with higher risks should stick with NPS. “Younger employees, who tend to have a higher risk appetite, will find NPS advantageous because of the potential gains in equity markets over time,” says Krishan Mishra, CEO, FPSB India. Remember that volatility ceases to be a concern for equity investors once the horizon extends to decades.
“For those who are risk averse and looking for a defined benefit, UPS could be a superior option,” says Dhawan.
An employee’s choice should also depend on how their other investments are invested. If their portfolio is comprised mostly of safer instruments, NPS equity exposure could add an element of inflation-beating returns to the portfolio. “Conversely, those who already invest in equities outside their retirement fund might prefer UPS for its more defined outcome,” says Dhawan.
Those opting for UPS should not rely solely on it. “Complement it with additional investments through NPS to enhance retirement security,” says Mishra.
First published: August 30, 2024 | 10:17 PM IS
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