In this article, Dr Varunkumar Jayapaul, a faculty member at IIT Mandi, shares his thoughts on who should choose the National Pension Scheme (NPS) and who should choose the Unified Pension Scheme.
Our NPS vs UPS coverage
- Revised UPS vs NPS Calculator after Jan 2025 Gazette Notification
- Unified Pension Scheme Formula Explained
- How does the Unified Pension Scheme work? Should you opt for it?
- Using Withdrawal Rates to compare Unified Pension Scheme and National Pension Scheme
- Why I prefer the National Pension Scheme to the Unified Pension Scheme
- A thumb rule to decide between Unified Pension Scheme and National Pension Scheme
Who may prefer UPS over NPS
1. Someone who has accidentally and voluntarily contributed huge sums in NPS corpus(tier -1) and is struggling to take it out and will never be able to take it out in case of NPS, whereas in case of UPS, the surplus will be returned back at the time of retirement tax-free.
2. Someone who foresees himself to be alive till the age of 85/90. At that point the absolute NPS pension will be the same as the NPS pension that an individual received at the age of retirement at 60/65 and it will not taking inflation into account. It is better to have an inflation adjusted pension like UPS in this situation, assuming you believe that the government will keep its promise.
3. Anyone who is not comfortable discussing/reading personal finance topics or believes that the family members who might survive after the employee’s death lack interest in managing these matters on their own. In such a case, the spouse will be given 30% (Basic+DA) in the best-case scenario, which the employee believes to be sufficient for their spouse.
4. Very limited flexibility is currently available in UPS. If you firmly believe that most of the flexible options (like delayed NPS exit or staggered lump sum withdrawal) of NPS will at some point in future be introduced in UPS as well, then you can switch to UPS.
Bonus:- Although not a reason to choose UPS, but if someone has chosen UPS then he can smartly use UPS as a debt fund ( as the default scheme has returns and risks similar to that of debt fund) and then get the surplus tax-free at the end of his/her service, although the catch is that this pseudo debt fund cannot be redeemed before retirement.
This is not an oversight on part of the government and they are possibly giving into the request of people demanding the return of OPS. These employees also wanted the GPF-like feature (available to OPS subscribers) to be provided in NPS. Government did provide tier-2 accounts in NPS, but the redemption of tier-2 units was not tax free, so employees did not like tier-2 accounts as an alternative to GPF.
Who may prefer NPS over UPS
1. Anyone who wishes to provide the remaining 40 % of the NPS corpus to their children. As of now, the 40 % of UPS corpus will go back to pooled corpus and they have not mentioned whether this portion of the corpus will be returned or not, so we can assume that it will not be returned to the legal heirs.
2. Anyone who intends (or foresees) himself staying outside India. In such a situation, both the NPS as well as UPS pensions might be insufficient, however, a lower pension which will arrive timely to your bank account seems like a better choice than a possibly higher pension which might face several months of delays. Such delays have been observed in the past in states like Himachal Pradesh, Kerala and countries like Greece and this can possibly happen to a subscriber if they choose UPS.
3. Anyone who likes the possibility of taking VRS and immediately starts getting pension, although he will only get 20 % of corpus as a lump sum and the remaining 80 % pension has to be used for pension. Immediate pension is not possible in UPS unless you reach superannuation age.
4. Anyone who likes the possibility of leaving a central govt job to join another state govt or private job. In such a situation, it is possibly better to have your accumalated units in NPS account than a UPS account which is not accessible to private company employees.
5. UPS will force closure of the corpus on the day of superannuation, whereas NPS will not force closure in a similar situation and allow the subscriber to possibly extend the NPS for another 10 years, with or without contributions.
6. NPS allows staggered withdrawal of corpus over 8-10 years in addition to lump sum withdrawal of 60 % at superannuation, whereas UPS does not allow staggered withdrawal. So, if you are worried about how you should invest the 60 % lumpsum of your corpus, you can defer that decision till the age of 70 if you have chosen NPS.
7. Anyone who believes that there is a possibility that 30 years down the line, the government may not have enough tax revenue to be able to support such enormous pensions and would ideally like to rely on private companies which are professionally managed to ensure no delays happen in your pensions.
(UNFPA) in its 2023 India Ageing Report has said that by 2046 it is likely that elderly population will have surpassed the population of children (aged 0 to 15 years) in the country. This is an unprecedented event which has never happened in all of the recorded history of this country.
Several developed countries like Japan and Italy are already facing the brunt of a declining young population but luckily for them their currency is strong. Governments worldwide use tax revenue from the working population to support the senior citizens’ pension, so if the number of senior citizens rises and the youth population decreases significantly, the governments face severe issues in taking care of their senior citizens.
8. Several countries have implemented pension schemes like NPS in their countries and they have been running successfully (i.e without defaults/delays) for the past 40+ years. No other country has implemented anything like UPS and so we do not have any data to assess its financial viability of an experiment being done at such a massive level.
9. In developed countries where the government struggled to support pensions. In such situations several countries have increased the retirement age to as high as 67. If you stick to UPS, you might possibly be asked to work till age of 67 and not allowed to withdraw your UPS corpus. In the case of NPS, it is harder to make such changes as NPS is also available to the general public.
Everybody is making claims as to why UPS is better (or worse) than NPS. Reality is that nobody has seen a single employee work 30 years under NPS and take a retirement to be able to make such a comparison.
In the end, it is definitely a gamble between NPS and UPS. You can prefer an assured pension and take UPS or you may prefer flexibility and choose to stay with NPS. There is also a possibility that the NPS pension is close to or exceeds the UPS pension payment (at least at the onset of retirement) and it is mentioned that if NPS pensioners get more than UPS pensioners, then UPS pensioners cannot claim the difference to be credited to their pension accounts.
The point of taking a government job was to ensure a simple retirement plan. Who would have thought that retirement planning would also become an IIT-JEE level entrance question 🙂
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