BAJAJ BROKING
October 05, 2024
1 mins read
Pension schemes are a vital part of a country's economy, reflecting gratitude to seniors for their years of service. These plans ensure financial security in retirement, acknowledge the contributions made by individuals throughout their working lives, and play a crucial role in sustaining economic stability.
With various pension schemes available choosing one can be overwhelming. Worry not, we have for you a comprehensive guide to pension schemes. A detailed analysis of UPS vs NPS vs OPS will help you decide which one would be most suitable for you.
The Indian government has also been quite sensitive to the pensioners. It is estimated that in the financial year 2024, central and state governments together spent about ₹9.6 trillion on employee pensions. Recently the NDA government introduced the Unified Pension Scheme. Along with the other prevalent schemes, the introduction of this new scheme has evoked different reactions from different sectors.
The three prominent pension schemes in the country today are:
Read on as we discuss UPS vs NPS vs OPS in detail.
Let us begin with the Unified Pension Scheme.
Overview and Key Features
In the history of pension schemes, UPS is the latest addition. UPS is a pension scheme, however, here an employee has to contribute 10% of their basic pay and the DA (dearness allowance). The government’s share will be 18.5%, which stands at 14% for NPS.
Eligibility Criteria
As per the information received, employees who have put in 25 years of service will receive a pension that equals 50% (half) of the average salary in the last 1 year/ 12 months.
Benefits and Drawbacks
The benefits of the UPS are listed below:
The policy is said to offer 5 key benefits:
The scheme has been designed to provide adequate financial security to the employees and their families.
However, keep in mind that the taxation details are still awaited. Also, many consider the Unified Pension System to be worse than the National Pension System. People consider that even after contributing 10% of the basic pay for the whole service period, pensioners will not receive a lump sum. Many consider that the new pension scheme does not offer the required financial stability.
Now, let us get into the National Pension Scheme details.
Overview and Key Features
The launch of the NPS in 2004, transformed the existing pension system, which is currently known as the Old Pension Scheme. Under the PFRDA, Pension Fund Regulatory and Development Authority, NPS is a voluntary investment program that offers pension post-retirement. Here, government employees contribute 10% of their basic salary plus DA, while the government contributes 14%.
Eligibility Criteria
The National Pension Scheme was extended to all sectors in the year 2009 except armed forces.
Benefits and Drawbacks
The benefits of NPS are as follows:
However, keep in mind that:
Additional Read: How Indian Women Can Benefit from Government Schemes
We will now discuss the Old Pension Scheme.
Overview and Key Features
This government-approved pension scheme for government employees offers a guaranteed monthly pension to those who have put in a minimum of 10 years of service. Assured pensions amount equal to 50% of the average basic pay over the previous 12 months before retirement for employees with at least 25 years of service.
Eligibility Criteria
OPS is for:Central government employees appointed before the NPS notification date which is 22 December 2003.
Benefits and Drawbacks
The benefits of OPS are as follows:
But at the same time, know that:
Particulars | UPS | NPS | OPS |
Nature | Government-backed pension benefits | Market-linked pension scheme | Defined-benefit pension plan |
Contributions | No individual contributions; funded by government | Employees contribute 10% of salary; government contributes up to 14% | No direct contribution from employees; fully government-funded |
Returns | Fixed pension amount, not market-dependent | Returns depend on market performance | Fixed pension amount, linked to last drawn salary |
Tax Benefits | No direct tax benefits for employees | Tax deductions under Section 80CCD | No tax benefits on pension received |
Withdrawal | Pension paid for lifetime, with certain conditions | Partial withdrawal allowed; lump sum on retirement | Full pension benefits without market dependency |
Risk Factor | Low risk, as it is government-backed | Market-dependent risk | No risk, as it is state-funded |
Each pension scheme operates under different structures, offering varying benefits depending on employment status, risk tolerance, and financial goals.
In conclusion, selecting the right pension scheme hinges on your financial priorities and risk appetite. While the OPS guarantees an inflation-linked pension, the NPS provides the opportunity to build a potentially larger retirement corpus. A new concept still to be launched, the UPS is expected to offer a balanced approach with both security and growth potential, ideal for those seeking a middle ground.
NPS is best suited for those willing to take on market risks for the chance of a larger retirement corpus. OPS, with its guaranteed, inflation-linked pension, might be perfect for those who prioritise stability and predictability. Carefully assess your needs to choose the scheme that best fits your retirement goals so that you can make an informed decision.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Employees in the private sector can also opt for NPS. They have the option to go for 14% of their basic salary toward NPS. Under the new tax regime, you can get income tax deductions.
The UPS is announced to be effective from 1 April 2025, and you will have the option of switching. However, once you opt for UPS, you cannot switch back to NPS.
Under the National Pension System, employees contribute 10% and the government makes a 14% contribution. Under the OPS, the employee did not contribute at all. Under UPS it is expected that employee will contribute 10% of their basic pay and the DA while the government’s share will be 18.5%.
NPS offers tax benefits of 1.5 lakhs under Section 80CCD, Rs 50,000 available under Section 80CCD (1B). Tax exemptions under the UPS are not yet announced. As in the OPS, the employees do not contribute, there aren’t any tax benefits.
OPS is a guaranteed pension scheme, with the pension fixed. In the case of the National Pension Scheme, there is potential for a larger corpus due to market-linked investments.
○ A premature withdrawal can be made after 5 years from the NPS account opening
○ There are specific reasons under which only a withdrawal can be made
UPS stands for Unified Pension Scheme. It is a recent initiative introduced by the government under Prime Minister Narendra Modi and is set to take effect in FY2025-26.
OPS stands for Old Pension Scheme. Under this scheme, government employees who have completed at least 10 years of service are eligible to receive a pension.
The National Pension System, commonly known as NPS, was launched in 2004. Initially designed for government employees, it was expanded in 2009 to include all sectors.
Choosing between UPS and NPS depends on your financial goals. UPS offers a balance of security and growth, while NPS provides higher growth potential but involves market risks.
The choice between UPS and OPS depends on your priorities. UPS offers a mix of security and market-linked growth, while OPS provides guaranteed, inflation-linked pensions, offering more stability but less growth potential.
The Old Pension Scheme (OPS) offers guaranteed income in retirement. The National Pension System (NPS), on the other hand, is market-linked, with the potential for a larger retirement corpus but comes with investment risks. OPS is better for those prioritising security, while NPS suits those comfortable with market fluctuations and seeking potentially higher returns.
OPS is a defined-benefit pension scheme that provides a fixed pension based on the employee’s last drawn salary, while NPS is a market-linked pension plan where returns depend on investment performance. OPS does not require contributions from employees, whereas NPS mandates employee and employer contributions.
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