The Union cabinet recently approved a new “Unified Pension Scheme” (UPS) that offers government employees a secure retirement which ensures that they shall receive 50% of their final salary as a pension. The new pension plan will come into effect on April 1, 2025, and is designed to benefit approximately 230,000 central government employees. On the other hand, if the state government choose to adopt this scheme, the number of beneficiaries could increase to 900,000, which may extend its advantages to even more people.
Under the scheme, as a government employee, you shall contribute 10% of your basic salary along with your Dearness Allowance (DA) towards your pension. Meanwhile, the government shall contribute 18.5% of your basic salary and DA. Furthermore, the government will also set aside an additional 8.5% into a separate pooled fund which may ultimately create a robust financial foundation for the pension system.
Speaking of its functionality, the plan ensures that when you retire, the pension will be calculated as 50% of the average of your basic salary from the 12 months which provides you with a stable and predictable income in your retirement years.
What Is The Eligibility For The Unified Pension Scheme?
Here are the eligibility criteria for the Unified Pension Scheme.
- All individuals who retired under the National Pension System (NPS) from 2024 are eligible for the program.
- Retirees will have their pension arrears adjusted based on what they have already received under the NPS.
- Employees have the option to stay with the NPS, although it may not be as beneficial as switching to the UPS. However, once a decision is made, it cannot be reversed.
- The scheme currently applies to central government employees but state governments have the option to adopt it as well.
How Does The Unified Pension Scheme Work?
Let’s take the example of a 42-year-old government employee named Mr Arjun Malhotra with an annual salary of Rs.9 lakhs and a basic salary of Rs. 7.8 lakhs. Under the Unified Pension Scheme (UPS), Mr Malhotra’s pension will be divided into two parts:
Under OPS (Old Pension Scheme) Portion
Mr Arjun shall receive 50% of the amount he would have received under the OPS which comes out to be Rs. 16,250 per month.
NPS (National Pension System) Like Annuity
Under NPS, things work differently.
Employee Contribution- 10% of basic pay = Rs. 78,000 per year
Employer Contribution- 10% of basic pay = Rs. 78,000 per year
The total annual contribution would be Rs. 156,000 and the rate of investment assumed at 8%.
With corpus after 18 years (let’s say you use 40% to purchase an annuity at a 6% rate), he would receive an annuity similar to what the NPS would provide, which may amount to Rs. 13,800 per month.
Under Unified Pension Scheme (UPS):
It combines the benefit of both options based on;
Pension = 50% of the OPS benefit + Annuity from an NPS Corpus |
When these two are combined, Mr Arjun’s total pension under the UPS would be approximately Rs. 30, 050.
Features and benefits of the Unified Pension Scheme (UPS)
Let’s take a look at the top features and benefits of the Unified Pension Scheme.
- Long-term fiscal sustainability
One of the biggest benefits of the new UPS is that it is designed to be financially stable, which may significantly reduce the government’s long-term financial burden. Unlike OPS and other pension schemes, the government doesn’t need to run into multiple financial constraints.
- Simplified and transparent pension structure
Another major benefit of the scheme is that it helps simplify pension management by putting everything in one place. Unlike OPS or NPS, it has a simplified payment structure which makes it quick and hassle-free for the government to manage it.
- Increased pension security
One of the major (or the most) highlighting aspects of the scheme is that it offers more predictable and secured benefits than any traditional pension scheme. Furthermore, it combines market-based returns with fixed benefits which ensure a guaranteed pension, protection against inflation, a family pension, and a minimum pension amount.
- Enhanced Returns
Another major aspect of the scheme is that it has the potential to deliver high returns via market investments similar to NPS, which also provide a guaranteed income from the OPS component.
- Hybrid Model with Dual Benefits
Last but not least, the major attraction of the scheme is that it comes with the stability of OPS’s fixed benefits with the flexibility and growth potential of NPS’s market-linked investments. Furthermore, it assures you of a guaranteed pension along with the possibility of earning higher returns.
Major differences between UPS, NPS, and OPS
There is no arguing with the fact that UPS, NPS, and OPS have some differences. Let’s compare them based on the following parameters.
| Parameters | UPS | NPS | OPS |
| Family Pension | The new UPS scheme provides 60% of the employee’s pension to their family in case of their unfortunate demise. | On the other hand, in NPS, the family pension depends on the accumulated corpus and the annuity plans chosen at retirement. | The OPS continues to provide pension benefits to the family after the retiree’s death which offers a stable support system. |
| Pension Amount | The UPS scheme ensures a pension of 50% of the average basic pay from the last 12 months before retirement. If the employee has served between 10 and 25 years, the pension amount will be proportional to the length of the service. | The pension amount is market-linked and varies based on the contributions made and the performance of the market investment. | In the case of OPS, the scheme provides a pension equivalent to 50% of the last drawn salary. Remember that the amount increases with Dearness Allowance (DA) hikes which even reflects adjustments for inflation. |
| Government Contribution | The government contributes 18.5% of the basic salary towards the pension. | In the case of NPS, on the other hand, the government contributes 14% of the basic salary. | Speaking of the OPS scheme, the entire pension cost is borne by the government which ensures no financial burden on the employee. |
| Employee Contribution | Coming to the new UPS scheme, the employees contribute 10% of their basic salary towards their pension. | Under the NPS scheme, the employees also contribute 10% of their basic salary. | On the other hand, under the OPS scheme, the employee does not have to contribute; the government covers the entire cost of the pension. |
| Inflation Indexation | The new UPS Scheme includes inflation indexation based on the All India Consumer Price Index for industrial workers, which ensures that the pension maintains its value in real terms. | In case of NPS, there is no inflation indexation. The pension is entirely dependent on market performance. | On the other hand, with the OPS scheme, the pension amount may increase with DA hikes which may provide adjustments to keep up with inflation. |
Final Thoughts
So, that’s all about it! That’s a wrap on everything you need to know about the Unified Pension Scheme (UPS). The UPS is designed to offer a balanced approach that supports both the government’s budget and employee benefits. Furthermore, it combines the guaranteed pension features of the Old Pension Scheme (OPS) with the contribution-based system of the National Pension System (NPS).
Even PM Modi has praised the UPS that it will ensure both dignity and financial security for government employees.
