Ensuring financial security after retirement is crucial, and selecting the right pension scheme plays a vital role in achieving this goal. If you aspire to receive a monthly pension of Rs 1 lakh post-retirement, you must invest wisely. Two major options are available: the National Pension System (NPS) and the Universal Pension Scheme (UPS). Let’s analyze both schemes in detail to determine which is the better investment plan for your future.
Implementation of UPS from April 2025
From April 1, 2025, all central government employees will have the choice to opt for either NPS or UPS. Since its launch in January 2004, NPS has replaced the Old Pension Scheme (OPS) and currently covers all central government departments. On the other hand, UPS is a newly announced pension scheme that will soon be implemented, offering a structured pension benefit to employees.
NPS vs UPS: Key Differences
National Pension System (NPS)
- Market-Linked Returns: NPS is a market-driven pension scheme where returns depend on investment performance in equity, debt, and other financial instruments.
- Investment-Based Payouts: Investors receive both lump sum and pension benefits after the age of 60 years.
- Contribution Model: The employee contributes 10% of their salary, while the government contributes 14%.
- No Fixed Pension Guarantee: The final pension amount depends on the accumulated corpus and the annuity purchase.
Universal Pension Scheme (UPS)
- Guaranteed Pension: UPS provides a fixed monthly pension based on a percentage of the average basic salary.
- Low-Risk Investment: Unlike NPS, UPS does not depend on market fluctuations, making it a more stable and secure option.
- Government Contribution: The government will contribute 18.5% of the total basic salary + dearness allowance (DA), while the employee contributes 10%.
- Inflation-Linked Growth: Pension benefits increase annually based on inflation adjustments.
Which Scheme Offers a Better Pension?
Pension Calculation Under UPS
To illustrate the benefits of UPS, let’s consider a scenario:
- An individual joins a government job at age 25 and retires at 60.
- They serve for 35 years with an average basic salary of Rs 2 lakh in their last year.
- UPS guarantees 50% of the average basic salary as a pension, which equals Rs 1 lakh per month.
- Additionally, pension benefits will increase annually based on inflation adjustments (estimated at 4.5%).
Thus, in year one of retirement, the pension would be Rs 1 lakh per month, and by the next year, it would increase to Rs 1.04 lakh.
Investment Requirements for Rs 1 Lakh Pension Under NPS
To achieve the same Rs 1 lakh monthly pension under NPS, an individual would need to make significant investments. Here’s an example:
- Joining Age: 25 years
- Retirement Age: 60 years
- Monthly Contribution (Employee + Government): Rs 16,800
- Estimated Return on Investment: 9% per annum
- Total Investment: Rs 70.6 lakh
- Total Corpus at Retirement: Rs 4.98 crore
- 40% Allocation for Pension: Rs 1.99 crore
- Estimated Annuity Return (6%): Rs 1 lakh per month
While NPS offers flexibility, it lacks the guaranteed pension benefit of UPS, making UPS a more reliable option for retirement planning.
UPS: A Safer and More Reliable Choice
- Market Volatility: UPS remains unaffected by market fluctuations, ensuring a stable pension.
- Government Support: The higher government contribution (18.5%) makes UPS a financially attractive option.
Guaranteed Returns: Unlike NPS, UPS ensures a fixed pension amount, offering peace of mind.
