Retirement Planning: With UPS in the fray soon, is it the time for govt employees to exit NPS?

As you are aware that the Union Government is set to roll out the Unified Pension System (UPS) from April 1, 2025 to give fixed, inflation-linked pensions to subscribers.

As of now, the scheme is meant only for 23 lakh central government employees and the state government employees are permitted to opt for them.

Wealth advisors suggest that having multiple options for the purpose of retirement is a good thing from an investor’s point of view.

“When you are aiming for long-term wealth generation and saving for retirement, it is good to have a bouquet of options to choose from. Besides, government employees will again have an option of a guaranteed pension plan,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.

Interestingly, NPS Trust gives a disclaimer on its portal that it does not guarantee or assure any returns while the new policies may impact the future returns.

Where does the NPS stand now?

Starting April 1, 2025, Central government employees will have the option to opt out of NPS in favour of UPS. They can, alternatively, continue with the NPS if they wish to.

So, it is pertinent to know the difference between the two pension choices before you decide to opt for one over the other.

National Pension System (NPS) is a pension scheme which was rolled out for government employees from Jan 1, 2004 but was later extended to all citizens of India in 2009.

But in order to choose UPS, you will have to bid adieu to this 20-year pension scheme. Let us deconstruct some of the key distinctions between the two options.

Differences between the two pension plans

I. Pension versus Guarantee: While NPS gives pension at the time of retirement in the form of annuity and lumpsum, UPS will offer guarantee. This is the old-school pension on the lines of the Old Pension Scheme where retirees were given a fixed inflation-adjusted pension throughout their lifetime.

NPS, on the other hand, gives the returns generated on investments made. The overall corpus created in NPS is a function of numerous factors which include the amount of investment made, exposure to equity, tenure of investment and the choice of pension fund manager.

II. Wealth creation versus fixed pension: NPS helps retirees create wealth over their lifetime by investing in a variety of financial assets including corporate debt, equity, government bonds and alternative investment funds.

This is a tool to save for retirement and the corpus is paid back in lumpsum and in annuities, thus offering a sense of financial security to the retirees. It is a way to build financial discipline to subscribers and professional fund managers are tasked with the job of investing the money in the right assets.

UPS, on the other hand, will work on a totally different model and will offer a fixed indexation-adjusted pension.

III. Predictability: NPS offers a number of options to subscribers. They can choose between active and auto choice of investing. Within auto choice, there are three sub variants: aggressive, moderate and conservative.

And within active choice, you can determine your allocation to different assets including equity, corporate debt, government securities and alternative investment funds such as REITS, AIFs, Invlts.

On the top of it, you can choose any of the 10 pension fund managers which will invest your money in the ratio of the allocation you opted for.

So, how much corpus will be eventually created is hard to predict because of the availability of too many variables. UPS, on the other hand, seems to be far more predictable – at least on the face of it.