Should I switch from National Pension Scheme to the Unified Pension Scheme?

Last Updated on August 28, 2024 at 10:29 am

With the introduction of the Unified Pension Scheme from 1st April 2025, many NPS government subscribers would ask,  Should I switch from National Pension Scheme to the Unified Pension Scheme? Here is a free calculator to find out!

At the time of writing, the full terms and conditions of the Unified Pension Scheme (UPS) are still unclear. So, the suggestions made in this article may change. This is what we know so far.

• Assured pension: 50% of the average basic pay drawn over the last 12 months before superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for a lesser service period up to a minimum of 10 years of service.
• Assured family pension: @60% of employee pension immediately before her/his demise.
• Assured minimum pension: @10,000 per month on superannuation after a minimum of ten years of service.
• Inflation indexation: on assured pension, on assured family pension and assured minimum pension
• Dearness Relief is based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) for service employees. The last 10-year average annual increase is about 5%
• lump sum payment at superannuation in addition to gratuity 1/10th of monthly emoluments (pay + DA) as on the date of superannuation for every completed six months of service without reduction in the quantum of assured pension
• Government NPS subscribers can switch to the UPS. They must transfer most of their NPS corpus to the UPS scheme.
• For UPS subscribers, the monthly employee contribution will be at 10% of basic+ DA, and the government contribution will be 18.5% (variable according to actuarial considerations).

I quickly ran the numbers for a few cases.  If the entire NPS corpus is used to purchase the same UPS annuity, the annuity rate (pre-tax) is 7% to 9.8% (depending on salary and service). I have not factored in the inflation-indexed component. That will make the effective annuity rate even higher! Such an annuity product (with inflation indexation close to 5%) does not exist in the market (i.e. with life insurers). Also, see: Is the Unified Pension Scheme sustainable?

However, you can match the inflation-indexed UPS pension if your salary and NPS corpus are large enough.

Download the free NPS vs UPS Calculator!

Version 8: Updated 28th Aug. with withdrawal rates in a separate sheet. Please check back for version updates. For feedback and bug reports, email freefincal [AT ] gmail [DOT ]com

Underlying logic: Can your future NPS corpus provide the same pension expected from UPS (with inflation indexation)? The NPS annuity provides part of this pension. Inflation indexation is provided via systematic withdrawals from the balance NPS corpus (if any!).

If the answer is yes, then stay in NPS. If the answer is no, find out how much the shortfall is. For example, you expect to live 30 years after retirement, and NPS can provide an inflation-indexed pension for 29 years. The shortfall (1Y) is small. NPS and UPS are still comparable. If the shortfall is large (several years), UPS is better than NPS.

So, at first sight, it seems like a no-brainer to switch from the NPS to the UPS. It must, however, be understood that such a pension alone is far from sufficient for a financially independent retirement. Please use the calculator and check for yourself. Let us consider some scenarios.

• Salary is quite low; expenses are relatively high. This typically means investments are low. The NPS corpus is expected to be low. A switch to the UPS may make sense here. However, in the remaining time until retirement, please invest as much as possible to build a nest egg to handle emergencies and inflation. In this case, there is not much of a choice.
• Salary is comfortably high; expenses are not much more than basic pay. If this means a good savings rate, it is a happy scenario with a proper choice. Either choice (UPS/NPS) is quite ‘okay’ as there is enough corpus to play with.
  • If you opt for the UPS, it will become an inflation-indexed income floor, lowering the risk of capital market risks on the rest of your corpus. See: Creating the ideal retirement plan with income flooring!
  • If you start with the NPS, you can still create an income floor with 40%(or more) of the NPS corpus and invest the rest in a bucket strategy.
  • I am emotionally attached to my NPS corpus  – Analyzing the growth of my 14-year-old NPS portfolio – so surrendering it to UPS does not appeal to me. However, if the rest of the corpus is large enough, switching to UPS would not be a big loss, considering the annuity rate (if high enough) and inflation indexation.
  • UPS has an option for a family pension. However, income flooring with an RBI bond held jointly with the spouse is a superior choice since we will get back the principal. And the pension is constant (family pension is only 60% of the pension)
  • NPS allows me the freedom to choose options like annuity laddering. See: Use this annuity ladder calculator to plan retirement with multiple pension streams.
  • Based on the above calculator, I would like to stay put in the NPS.
• Salary is neither high nor low:  Most people reading this will probably fall here. UPS seems reasonable if the NPS annuity rate needed to match the UPS pension is high enough. You must use the calculator to determine how strong your future NPS corpus is. In any case, the onus is on the employee to invest prudently elsewhere in the remaining time, regardless of their choice.

In summary, as per the available information, my understanding is to compare your current expenses (that will persist in retirement) with your basic pay. UPS seems like a good idea if your expenses exceed your basic or comparable expenses. If your expenses are much lower than your basic or your corpus (excluding NPS) is large enough, you have the luxury of choice.

If your corpus is large enough, you can still consider if UPS can be used as a pension income floor, but it will mean forgoing your NPS corpus (shifting it to UPS), which will not be easy! Please do not be in a hurry to switch. Analyse your situation with exact numbers once the circular comes out, and then take a call. We shall discuss this further as more details emerge.