The Union Cabinet approved the Unified Pension Scheme (UPS) on Saturday, which ensures an assured pension for government employees after retirement. This scheme will be enacted for central government employees from 1 April 2025. The pension system shifts to the UPS from the current National Pension System (NPS). State governments can also adopt the Unified Pension Scheme.
This scheme aims to benefit government employees and offers many facilities. Information and Broadcasting Minister Ashwini Vaishnaw said that under UPS, central government employees will receive a fixed assured pension. PM Narendra Modi constituted a committee under the chairmanship of Cabinet Secretary TV Somanathan. This committee held 100 meetings with several top organizations, including the Reserve Bank of India and the World Bank, to decide on this scheme. It will benefit 23 lakh central government employees.
Features
Assured Pension
Assured pension amount equals 50% of the employee’s average basic pay dawn over the last 12 months before superannuation. Only employees with a minimum service term of 25 years are eligible for the pension amount. The amount would proportionately go down for a smaller service period (up to a minimum of 10 years of service).
Assured Family Pension
After a retiree’s death, the immediate family will be eligible for 60% of the employee’s pension immediately before their demise.
Assured minimum pension
Every central government employee is eligible for a minimum pension of 10000 per month after a minimum of 10 years of service.
Inflation Indexation
Dearness relief is based on the All-India Consumer Price Index for Industrial Workers (AICPI-W), similar to serving employees. It will be available on the three kinds of pensions mentioned above.
Lump-Sum Payment at Retirement
In addition to gratuity, a lump-sum payment of 1/10th of the monthly emolument (pay + DA) as of the date of superannuation is provided for every completed six months of service. This payment will not affect the assured pension amount. Gratuity is an amount paid by an employer to its employees for contribution to their service.
The Information and Broadcasting Minister Ashwini Vaishnaw also said that government employees can choose between the current NPS and UPS.
Unified Pension Scheme vs National Pension Scheme
The National Pension Scheme (NPS) was introduced in 2004. It initially covered only central government employees, but later, it expanded to all sectors. The NPS is mainly a long-term investment program designed for retirement. It operates through Tier 1 and Tier 2 accounts. Withdrawals from tier 1 accounts are allowed only after retirement.
#Cabinet approves Unified Pension Scheme (UPS)
The salient features of the UPS are:
🔹 Assured pension: 50% of the average basic pay drawn over the last 12 months prior to superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for lesser…
— PIB India (@PIB_India) August 24, 2024The UPS provides a fixed assured pension amount to retirees. However, the pension amount of the NPS is not a fixed pension amount. The UPS assures a family pension of 60% of the employee’s pension. The NPS has no features as an assured family pension. The NPS does not provide any type of minimum pension, but the UPS allows an assured minimum pension of 10,000 per month after a minimum of ten years of service.
The UPS has an inflation indexation feature, calculated based on the All-India Consumer Price Index for Industrial Workers. There are no indexation benefits. There is a lump sum payment at superannuation and a gratuity from the Unified Pension Scheme. There is no such provision in NPS, but there is an option to withdraw 60% tax-free at retirement.
Eligible Employees
Central Government employees can choose between the NPS and the UPS. The minimum service year is 10 years, and the maximum service year is 25 years. Even existing central government NPS subscribers can also be shifted to UPS.
Unified Pension Scheme (UPS)
🔹 #Cabinet approved introduction of Unified Pension Scheme to improve the National Pension System (NPS) for Central Government employees
🔹 UPS to be given effect from 01.04.2025
🔹 Employees who have adequate service to get an assured pension… pic.twitter.com/IVFmYlAafJ
— PIB India (@PIB_India) August 25, 2024Fiscal implications of UPS
The expenditure for arrears will be 800 cores. The annual cost will be 6250 cores in the first year. The newly launched pension scheme UPS must positively impact a government with high debt and a high debt-to-GDP ratio. However, the scheme’s cost could strain government finance. A Reserve Bank of India study (September 2023) warned that if all the states switched to OPS, the fiscal burden could be up to 4.5 times that of the National Pension System (NPS), potentially reaching 0.9% of GDP annually by 2060.
According to Krishan Mishra, CEO of FPSB India, “UPS will offer a combination of the stability of Old Pension System’s (OPS’s) fixed benefits with the flexibility and self-contribution features of NPS”. He also added that UPS is a hybrid model that provides employees with a balanced, predictable pension structure that is adaptable to market conditions.
Best pension scheme after retirement
In India, there are three types of pension schemes: Unified Pension Schemes, National Pension Schemes, and Old Pension Schemes. The taxation of UPS has not been declared yet, but everyone expects that the pension income under UPS will be subject to income tax. The Lump Sum payment has also been unclear until now. Pension plays a vital role in ensuring financial stability for government employees.
After the announcement of this newly launched Pension Scheme UPS, there is a question: is it sensible to shift the NPS to the newly introduced UPS? Under UPS, employees contribute 10% of their basic pay plus DA (dearness allowance). In NPS, the government contribution has increased to 18.5% from 14%. However, OPS did not require employees to contribute to the pension fund. The OPS guarantees a pension based on the last drawn salary, whereas this newly launched pension scheme reduces the risk of interest rate fluctuations and longer life expectancy.
The OPS ensures a fixed pension amount, which is 50% of the employee’s last drawn salary, is given to employees after retirement. Under OPS, the retirees receive a dearness allowance adjusted with concurrent inflation. According to Pankaj Dhingra, managing partner & Co-Founder of Fin Tram Global LLP, knowing the retiree’s long-term financial goal, risk tolerance, and expectations is crucial when choosing between this three-pension scheme.
OPS gives the security of guaranteed returns, NPS provides high returns with some risk, whereas UPS is a mix of both. So, knowing about personal financial plans and life goals is imperative. Due to some issues with taxation in the newly launched pension Scheme, there is a campaign named “#NoNPS_NoUPS_OnlyOPS” in X. It is the second most tweeted trending topic. Vijay Kumar Bandhu, National president of the National Movement for Old Pension Scheme, trends the tweet with the caption “#NoNPS_NoUPS_OnlyOPS”.
FAQ
What is the Unified Pension Scheme?
The UPS is a hybrid model that provides employees with a balanced pension structure that is predictable and adaptable to market conditions.
Which committee decides on the Unified Pension Scheme?
PM Narendra Modi constituted a committee under the chairmanship of cabinet secretary TV Somanathan. This committee held 100 meetings with several top organizations, such as RBI and the World Bank, to decide on this scheme.
When will the Unified Pension Scheme be enacted?
From the next fiscal year, the UPS will be enacted. It will be effective from April 1, 2025.
What are the benefits of the Unified Pension Scheme?
The benefits of this newly launched Pension Scheme are an assured fixed pension, an assured family pension, a guaranteed minimum pension, inflation indexation, and a lump sum payment at retirement.
What was the pension amount in the Unified Pension Scheme?
Employees with a 25-year service term will receive an assured pension equal to 50% of the employee’s average basic pay. At the same time, Employees with a minimum 10-year service term will receive an assured pension proportionate to their service years.
Who can apply for the Unified Pension Scheme?
Central government employees with a 10-year to 15-year service period can apply for the UPS.
Is it mandatory for the Unified Pension Scheme?
No, it is not mandatory for every central government employee to choose the UPS. Central Government Employees can choose between the national pension scheme and the newly launched pension scheme (UPS). Even National Pension Scheme subscribers have switched to the newly launched Pension scheme.
What is better, UPS or NPS?
The UPS provides an assured pension to retirees, an assured family pension to retirees’ families, an assured minimum pension, inflation indexation, and lump sum payment at retirement.
What is the fiscal impact of the UPS?
The Old Pension Scheme or National Pension Scheme places a significant financial burden on the government. Still, the UPS is designed to cap this burden and ensure employees receive a secure post-retirement income.
What is the esteemed cost for the first year of the Unified Pension Scheme?
The arrears expenditure will be 800 cores. The annual cost increase will be 6250 cores in the first year.
