Last Updated on January 26, 2025 at 9:01 pm
Several readers have asked us for a calculator to help them decide if they should switch from the National Pension Scheme (NPS) to the newly announced Unified Pension Scheme (UPS). Such a calculator is now available for free download, but several caveats must be considered.
This is not an easy calculation, especially for those new in government service (less than ten years), as it will involve projecting future contributions into the NPS and UPS (for comparison). Many variables influence these, including promotions, pay commissions, increments, and DA twice yearly.
Only when the service is significant and the NPS corpus large enough can a reasonable comparison be made. I shall now discuss how to compare NPS and UPS using a simple illustration.
The ideal comparison would be to check if the NPS corpus can generate a pension plus periodic inflation-indexed withdrawals comparable to the UPS. Only those close to retirement can make such a meaningful comparison. For others, there are too many variables at play.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
For what it is worth, this is the ideal thumb rule for comparing UPS vs NPS.
- Project your future NPS corpus at the time of retirement.
- Find the pension one can obtain with a reasonable annuity rate from an insurer with 40% of the future corpus.
- NPS is better if this pension is greater than or equal to 50% of your basic pay at retirement. You should then be able to generate the 5% inflation indexation with the rest of the corpus. This is the case for me. So, it makes sense for me to stick with NPS.
- If not, you must see how much of the NPS corpus you must use to get a pension = 50% of the last drawn basic and how much of the corpus is left. The more the NPS corpus is used, the more favourable it is for UPS.
- The problem with this is that the projection has too many variables and is not reliable unless one is close to retirement.
- My preliminary impression is that for those with basic > 1L, the final NPS corpus will be reasonably high (if they are far away from retirement). Then, the minimum 40% NPS pension will be reasonably high. They could manage with NPS if their other investments are substantial.
Note: The corpus from other investments is crucial here. If this is significant, one can afford to stay with the NPS even if UPS is more beneficial. So, we must go beyond the calculator and look at personal circumstances.
Download the free NPS vs UPS Calculator version 10 updated Jan 2025 after Gazette Notification!
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.
Note: The numbers used are only for illustration and may not represent actual situations. This annuity rate will depend on service, the NPS asset allocation and returns. So it will change yearly for the same person. We held an anonymous poll on social media and are currently processing it. We will post the results later.
Case 1:
- We will consider an employee with a basic pay of Rs. 50,000.
- Service: 18 years
- NPS Corpus: Rs. 30 Lakhs
- Monthly Pension if he quits now, choosing UPS: 50,000 X 0.36 = 18,000. The factor is 0.5 (half) for those with 25 years of service or more. So, the proportional factor assumed is 0.36. The actual factor may be different.
- To get a monthly pension of Rs. 18,000 with an NPS corpus of 30 lakhs (assuming the full corpus is annuitised), the rate required is 18000×12/3000000 = 7.2%
- This annuity rate excludes the about 5% annual increase in pension due to dearness allowance hikes.
Case 2:
- An employee with a basic pay of Rs. 90,000.
- Service: 25 years
- NPS Corpus: Rs. 55Lakhs
- Monthly Pension if he quits now, choosing UPS: 90,000 X 0.56 = 45,000.
- To get a monthly pension of Rs. 45,000 with an NPS corpus of 55 lakhs (assuming the full corpus is annuitised), the rate required is 45000×12/5500000 = 9.82%
- This annuity rate excludes the about 5% annual increase in pension due to dearness allowance hikes.
The annuity rate in case 1 is quite nominal. In case 2, it is quite high. In both cases, no annuity products provide close to a 5% indexed pension. Who should switch to UPS and who can afford not to depends on the basic pay, expenses, the corpus outside NPS, and family circumstances. Please follow the guidelines mentioned above and make a projection.
Also, see: Should I switch from the National Pension Scheme to the Unified Pension Scheme?
In any case, we urge readers not to act in a hurry. Please wait for the UPS circular, make a detailed calculation for your personal situation and then decicde.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)