NEW DELHI: The Unified Pension Scheme (UPS), which was opened for switching from the market-linked National Pension System (NPS) on April 1, has made a tepid start even though pension at 50% of the last 12 months’ average pay is guaranteed.
With the central government staff weighing the cost-benefit between NPS and UPS, in the first two weeks since the option became available, just a little over 1,500 central government employees have opted for the UPS. That’s 0.05% of the 2.7 million central government staff enrolled in NPS since it was rolled out in 2004. Of course, these are still early days and the window for joining the scheme will be open till June 30.
No capital return option under UPS, longevity of service and higher individual corpus under NPS among factors being debated by the employees before making up their mind on the switch. The timeline can be extended if required.
Following a prolonged demand to revert to the fiscally unsustainable non-contributory old pension scheme (OPS), the Centre unveiled UPS with features to some extent similar to the OPS. It will provide assured pension of 50% of last drawn salary (average basic pay of last 12 months of service) upon superannuation for all employees completing minimum 25 years of service, with value of such deferred compensation fully indexed to inflation. Besides, there will be assured payouts to spouse of the pensioner after his/ her demise at 60% of the last pension drawn. Also, all employees with minimum 10 years of service will get assured pension of Rs 10,000 per month.
According to the extant NPS norms, a maximum of 60% of the accumulated NPS corpus from contributions during a person’s working years is allowed to be withdrawn tax-free at the time of retirement. The subscriber has to invest a minimum of 40% of the corpus in annuities for a regular pension.
In the current NPS architecture, subscribers have a choice of what annuity to purchase. She may purchase units with the return of purchase price (capital), in which case she may get lower returns. If she purchases units without the option of return of purchase price, the annuity/pension could be higher.
In UPS, however, there aren’t any such options. Once the death of the dependent, annuity will cease, and no further payment or capital return is required as it is a joint life annuity without return of purchase price.
Under UPS, the employee contribution shall remain unchanged at 10% (of basic pay + DA). The government’s contribution will increase from the present 14% (under the market-linked national pension system) to 18.5%.
Under the proposed UPS, the pension corpus will be divided into two: individual pension funds to which the employee’s and matching government contribution of 10% each (totalling 20%) will be credited; and a separate pool corpus created out of additional government contribution (8.5% of basic and DA of all employees) to bridge the likely shortfall if any to pay a guaranteed pension of 50% of pay.
If a government subscriber withdraws up to 60% of the corpus in a lump sum after superannuation from the individual account (built from 20% of basic pay +DA) under UPS, there will be a proportionate reduction in the guaranteed pension. In the case of NPS, if the withdrawal is 60%, the balance 40% corpus could be bigger given that the corpus is built from monthly contribution of 24% (Centre 14% + employee 10%) compared to a 20% corpus in the individual UPS account of the subscriber.
“If life expectancy beyond 80 or joined at 35 plus age, I think UPS is better. But, if joining it at an younger age, then opting for NPS makes sense since it would generate a huge corpus due to longer time horizon,” a central government employee said referring to the discussion in their friend circles. ,
In some cases, if both husband and wife are in the government service, one is opting for UPS while the other remains in NPS, another employee said.
Source: The Financial Express
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