UPS or NPS: Should Young Employees and Risk Takers Continue with NPS or Not?

The Central Government will implement the Unified Pension Scheme (UPS) as an alternative to the National Pension System (NPS) from April 1, 2025. Should employees who presently use NPS remain with it or switch to UPS?

Unified Pension Scheme (UPS)

UPS combines aspects of defined contribution and defined benefit. Employees contribute 10% of their basic income plus dearness allowance (DA), and the government contributes 18.55% of their basic salary plus DA. The government contributes more to UPS (18.5%) than NPS (14%).

Advantages of UPS

UPS guarantees a pension of 50% of the last taken salary, depending on the average of the last 12 months. “It is an assured pension scheme and does not leave the outcome to the vagaries of market forces,” according to specialists. It therefore addresses a major issue expressed by government employees enrolled in the National Pension System.

According to experts, government employees must have completed at least ten years of service to be eligible for UPS benefits.

Disadvantages of UPS

Employees in NPS can have a higher equity exposure, which can lead to higher long-term gains.

“This could be advantageous for employees comfortable with risk as they could benefit from market upswings,” according to experts.

UPS requires employees to have completed 10 years of service. Those who retire early will be ineligible. Currently, central government employees are eligible for UPS. So far, only Maharashtra has consented to implement it.

“Only a limited number of employees qualify for UPS currently,” the experts claim.

National Pension System (NPS)

Employees contribute 10% of their salaries to the National Pension System, while the government contributes 14%. The funds are invested in equities, government securities, and corporate bonds. At retirement, 40% of the corpus must be annuitised.

Advantages of NPS

Its primary advantage is the ability to build a larger corpus through increased equity exposure.

“Employees also have the flexibility to choose their allocation to the three asset classes,” experts said.

Disadvantages of NPS

The employee bears the risk. Experts say, if the funds are invested and perform poorly, the employee bears the consequences.

Some people may find that having so many options is overwhelming. Furthermore, at retirement, 40% of the corpus must be annuitised, reducing flexibility.

How Should Choose between the Two?

Individuals who are okay with increased risks should continue in NPS.

“Younger employees, who tend to have a higher risk weight, will find NPS advantageous due to the potential gains from equity markets over time,” according to experts.

Remember that fluctuation in equities becomes less of a concern for investors as the time horizon extends to decades.

“For those who are averse to risk and seek a specific benefit, UPS might be a superior option,” suggest experts.

An employee’s decision should also consider how her other investments are allocated. If her portfolio is primarily comprised of safer products, NPS’s equities exposure may provide an aspect of inflation-beating returns.

“In contrast, those already investing in equities beyond their retirement corpus might prefer UPS for its more defined outcome,” according to experts.

Those choosing UPS should not rely completely on it.

“Increase it with additional investments through NPS to enhance the security of retirement,” according to experts.