Retirement planning is something we all think about at some point in our lives, right? It may seem far off, but planning in advance can make all the difference tomorrow. And with so many schemes and options available, it is normal to feel overwhelmed.
The National Pension Scheme and the Unified Pension System are two schemes designed and initiated by the government to secure your post-retirement years.
But you may ask: which one is right for me?
In this blog, we’ll take a closer look at these two popular retirement plans, break down their key features, and help you understand how to make the best choice for your future.
National Pension Scheme
The NPS is a voluntary and long-term investment scheme for retirement initiated by the Government of India. The scheme is open to public-sector, private-sector, and even unorganised sector employees.
Employees invest a portion of their income towards savings for retirement at regular intervals throughout the career or job. Post-retirement, income is generated from the corpus accumulated over the years. Also, a portion of savings is invested further in equities or debt instruments, which means that returns may not be guaranteed.
Features of NPS:
- Voluntary scheme for employees and employers.
- Tax benefits for both self-employed individuals and employees under Section 80C and 80CCD.
- Benefits from equity or debt investments for potentially higher returns.
- Portability option, allowing you to continue even if you wish to switch jobs.
- Option to make partial withdrawals for emergencies.
Unified Pension System
The UPS or Unified Pension System is an initiative taken by the Government of India to provide stability and financial security to government employees of the nation. It ensures the well-being of employees in their post-retirement years.
Features of UPS:
- Only open to government employees as of now.
- Assured pension to employees after meeting certain criteria.
- Family pension in case of an employee’s sudden demise.
- Assured minimum pension upon fulfilment of certain conditions.
- Indexation benefits on pensions.
- Lump-sum superannuation payouts.
Let’s differentiate the schemes and learn about these in more detail.
Eligibility
Both government and non-government employees are eligible for the National Pension Scheme. UPS, on the other hand, is only available to government employees as of now.
Minimum Pension Amount
There is no guarantee of minimum pension under the NPS scheme. However, the government guarantees ₹10,000 every month for government employees after they have served for at least 10 years under the UPS policy.
Employees’ contribution
The employee contribution for both schemes UPS and NPS is the same i.e. 10% of the base salary.
Employer’s contribution
In NPS, the contribution of employers is 14% of the basic salary. Meanwhile, at UPS, the government contributes 18.5% of the base salary.
Pension amount
Under NPS, pension amounts are market-linked and volatile. UPS, on the other hand, offers 50% of the average basic pay drawn over the last 12 months as a pension to the employees.
Family pension
NPS does not offer any special provision for family pensions. The amount entirely depends upon the corpus generated over the years and the annuity plan chosen. Under UPS, however, 60% of the pension would be immediately made available to the family members of the employee in the event of the employee’s demise.
Risk
NPS is a market-linked scheme, so the returns are volatile and the risk associated with this scheme is higher. UPS provides risk-free, assured returns in the form of stable pensions to employees.
Inflation adjustment
NPS doesn’t offer any option to adjust pensions against rising living expenses or inflation. UPS, on the other hand, offers adjustments for inflation based on the All India Consumer Price Index For Industrial Workers.
Tax benefits
40% of the amount withdrawn as a Lump Sum from the corpus generated is tax-free, while the rest is taxable under the NPS. However, the government has yet to clarify how withdrawals under the UPS scheme will be taxed.
Gratuity
NPS does not provide gratuity benefits. UPS, however, includes gratuity payments along with additional payouts.
Flexibility
The NPS scheme is valid even if employees decide or wish to switch jobs. However, if government employees wish to switch to the private sector, they might not be eligible to continue with UPS.
Which one is better?
Both schemes have unique features and distinct advantages to offer. No one policy is inherently better than the other.
NPS might be a suitable option for those who have a long way to go till retirement and who wish to benefit from returns from the equity market. Higher risk comes with the potential to generate higher returns, making it ideal for those seeking to grow their retirement corpus.
UPS, on the other hand, might be an ideal option for employees nearing retirement who want a stable income stream to fund post-retirement expenses. With a guaranteed minimum pension and assured benefits after fulfilling certain criteria, it is a great choice for risk-averse employees.
Prasad Iyer
[Certified Financial Planner – CFP CM]
