Unified Pension Scheme (UPS) 2024: Will it be sustainable?

Are you a Central Government employee wondering how your pension might change in the future? Unified Pension Scheme (UPS), which was recently approved by the Indian government, to provide more certainty and security in retirement benefits. But what does this mean for you, and how is it different from the current National Pension System (NPS)?

Let’s dive into the key details of the UPS and understand its features, benefits, and how it could impact your retirement planning.

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The introduction of the Unified Pension Scheme (UPS) on August 24 by the central government aims to address concerns among government employees about securing their pension income post-retirement. This scheme is available to current subscribers of the National Pension System (NPS), including retirees.

Overview of the Unified Pension Scheme (UPS):

• The Unified Pension Scheme (UPS) was introduced to enhance the existing National Pension System (NPS) for Central Government employees.
• The initiative aims to address employee concerns regarding pension certainty, family pensions, minimum pensions, and inflation indexation.

Committee Formation and Recommendations:

• A committee led by the Finance Secretary was formed to review NPS and suggest improvements.
• The committee included representatives from State Governments, employee associations, and the Reserve Bank of India.
• The committee’s recommendations, which form the basis of the UPS, were discussed with employee representatives.

Key Features of the Unified Pension Scheme (UPS)

Pension:

• Assured Pension: Employees with sufficient service will receive a pension equal to at least 50% of the average salary of the last 12 months.
• Minimum Pension: Set at Rs 10,000 per month for employees with at least 10 years of service.
• Family Pension: The spouse will receive 60% of the pension.
• Dearness Relief: Applicable on assured pension, minimum pension, and family pension. DR will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) for service employees. The last 10-year average annual increase is about 5%.
• Lump Sum at Retirement: In addition to gratuity, retirees receive 1/10th of their monthly emoluments (including basic pay and DA) for every completed six months of service. This does not reduce the amount of assured pension.

Contribution Structure

• Employee Contribution: Remains unchanged at 10% of Basic Pay + Dearness Allowance (DA).
• Government Contribution: Increased from 14% to 18.5%, divided into two funds:
  • Individual Pension Fund: Receives both the employee’s 10% contribution and a matching 10% government contribution.
  • Separate Pool Corpus: Receives the additional 8.5% government contribution that goes to a “guarantee reserve fund”.

Investment Choices and Pension Calculations

• Employees can opt for investment choices for their pension corpus.
• Withdrawal of up to 60% of the pension corpus is allowed, with a proportional reduction in the assured pension.

Assured Pension Calculations:

• Based on the ‘default mode’ of investment as notified by the Pension Fund Regulatory and Development Authority (PFRDA).
• If the benchmark annuity is lower than the assured annuity, the government will cover the shortfall.
• If the employee’s investment generates a higher annuity than the benchmark, the employee will receive the higher amount.
• If the annuity generated is lower than the default mode, the government top-up through UPS is limited to the benchmark annuity.

Eligibility and Options for Employees

• Full assured pension available for 25 years of qualifying service; pro-rata for at least 10 years.
• Employees have the option to continue with NPS or opt for UPS.
• The UPS will be effective from 1st April 2025.

Applicability and Benefits

• Can be adopted by State Governments and is expected to benefit 90 lakh employees.
• Ensures full funding by the government to safeguard employees’ welfare.

Also read: UPS vs OPS: The 5 Key Differences You Should Know & How it Can Affect the Retirement Benefits

Sustainability Concerns: Will the UPS Guarantee Work?

• Tax Implications:
  • Tax details are still awaited, but pension income is expected to be taxed according to the applicable income tax rates.
  • The taxation of any lump sum payment under UPS is also unclear at this stage.
• Administration: The government has not yet clarified the following things:
  • Who will manage the UPS? It may fall under the purview of the Pension Fund Regulatory Authority of India (PFRDA) and be integrated within the existing NPS framework.
  • What will happen to the NPS funds if someone switches to UPS?
  • What will the government contribute (14% or 18.5%) to NPS if someone chooses to stay with NPS instead of switching to UPS?
• Contribution Debate:
  • There’s a question of why the government is contributing 18.5%, a higher percentage than employees.
  • A more balanced contribution, such as a higher employee percentage and a lower government percentage, could reduce the pension burden of the government.
• Investment Strategy:
  • The government may aim to generate returns through prudent investments in stocks and bonds to support annuity payouts.
  • This could help make the scheme self-sustaining without relying on higher taxes.
• Risk Management:
  • The UPS requires careful management of the pension corpus to ensure sustainability. The guarantee reserve fund will be essential in covering any shortfalls.
  • Strong governance is needed for the investment of funds, particularly for the guarantee reserve fund, to ensure the scheme remains viable without adding extra financial strain on the government.
• Inflation Management:
  • Controlling inflation below 5% is crucial for maintaining a sustainable pension system.
  • Regular reviews will be necessary to assess and adjust the sustainability of the scheme.

Final Thoughts:

• Stay Informed:
  • Don’t rush into decisions regarding the UPS.
  • Wait for the official circular, calculate your options carefully, and make an informed decision.

Frequently Asked Questions (FAQs):

Please read our other articles based on Retirement Planning:

• UPS vs OPS: The 5 Key Differences You Should Know & How it Can Affect the Retirement Benefits
• NPS Withdrawal Rules Change In October 2023: PFRDA Modifies Withdrawal Exit And Bank Details Update Rules
• NPS Systematic Lump Sum Withdrawal Facility (SLW): New Withdrawal Rules Introduced by PFRDA In October 2023
• NPS Pension Fund Manager Choosing Rules Changed By PFRDA In November 2023: Investors Can Now Choose Up To 3 PFMs For Different Asset Classes

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