New Delhi: The central government recently approved the Unified Pension Scheme (UPS), offering government employees an “Assured Pension and Assured Family Pension.” This new scheme is set to roll out on April 1, 2025, and it promises a defined retirement benefit that contrasts sharply with the existing National Pension System (NPS), which is market-driven.
What is the Unified Pension Scheme?
The Unified Pension Scheme guarantees a pension of 50% of the employee’s average basic pay from the last 12 months before retirement, provided they have completed at least 25 years of service. For those with 10 to 25 years of service, the pension amount is proportional to their service duration. Additionally, in the event of an employee’s death, the family is entitled to receive 60% of the employee’s pension, ensuring financial security for dependents.
How Does NPS Differ?
The National Pension System (NPS) operates on a defined contribution basis, where both the employee and the government contribute towards the pension fund. The final pension amount is not fixed but depends on the market performance of the invested funds in debt and equity instruments. This creates potential for higher returns but also exposes the pension to market risks.
NPS is available to individuals aged 18 to 60, with plans to extend the age limit to 65. It offers a two-tier account structure:
- Tier-1 Account: A mandatory pension account with tax benefits.
- Tier-2 Account: An optional investment account linked to Tier-1, offering flexibility for withdrawals.
Guaranteed Pension vs. Market-Based Returns
One of the key differences between the two schemes lies in the nature of the pension benefits. Under the Unified Pension Scheme, there is a guaranteed minimum pension of ₹10,000 per month for employees with at least 10 years of service. This scheme does not require any contribution from the employee, making it a more predictable and stable option.
In contrast, the NPS pension is based on the accumulated corpus in the pension fund, and the payout depends on the annuity plan chosen at retirement. This approach provides potential for higher returns but with greater exposure to market fluctuations.
Applicability and Impact
The Unified Pension Scheme is designed for employees with longer service tenures and aims to offer a stable retirement income. It will come into effect for employees retiring by March 31, 2025, including the payment of any arrears.
NPS, on the other hand, applies to government employees who joined service after April 1, 2004, requiring a 10% contribution from the employee’s basic salary, which is matched by a 14% contribution from the government.
Conclusion
The introduction of the Unified Pension Scheme provides government employees with a more secure and predictable retirement plan compared to the National Pension System. While NPS offers flexibility and potential for higher returns, the Unified Pension Scheme’s assured benefits and lack of contribution requirements may appeal more to those seeking financial security in retirement.
