Unified Pension Scheme (UPS): A New Era for Government Employees

The Unified Pension Scheme (UPS) is set to revolutionize retirement planning for central government employees starting April 1, 2025. Have you been searching for a more secure pension plan? Your wait is over. On Friday, the Union Cabinet approved the UPS, ensuring that government employees will receive 50% of their last drawn salary as a pension. This innovative scheme is expected to benefit around 230,000 central government employees, with the possibility of extending its reach to 900,000 if state governments choose to adopt it. This could be the crucial change you need to secure your financial future.

How the UPS Works

Under the UPS, government employees will contribute 10% of their basic salary plus Dearness Allowance (DA), while the government will contribute 18.5%. Additionally, an extra 8.5% from the government will fund a separate pooled corpus, ensuring a strong pension plan. The UPS guarantees a pension amounting to 50% of your average basic salary over the last 12 months. Adhil Shetty, CEO of Bankbazaar.com, noted, “The UPS has the potential to revolutionize India’s pension system, offering a more sustainable solution for both the government and its employees. However, how well it is implemented will determine how effective it is.”

Pension Calculation under Different Schemes

To illustrate how much pension you might receive, Krishna Mishra, CEO of FPSB India, explains the calculation for Ashisha, a 42-year-old government employee who receives basic pay of Rs 7.8 lakh and earns Rs 9 lakh annually.

Old Pension Scheme (OPS)

Under the OPS, the pension is calculated as 50% of the last drawn basic pay. For Ashish:

• Base salary: Rs 7.8 lakh annually
• Basic pay per month: Rs 780,000 ÷ 12 = Rs 65,000.
• Pension: Rs 32,500 per month, or 50% of Rs 65,000

Thus, Ashish would be entitled to a pension under the OPS each month, roughly Rs 32,500.

National Pension System (NPS)

The NPS functions differently, with the pension amount based on the accumulated corpus. Here’s how it would work for Ashish:

• Employee contribution: 10% of basic pay = Rs 78,000 per year
• Employer contribution: 10% of basic pay = Rs 78,000 per year
• Total annual contribution: Rs 156,000
• Assumed return on investment: 8% per annum
• Corpus after 18 years: Approximately Rs 6.9 million

From this corpus, if Ashish uses 40% to purchase an annuity at a 6% rate, he would receive:

• Monthly pension: Rs 13,800

Thus, Ashish would get a pension of about Rs 13,800 per month under the NPS.

Unified Pension Scheme (UPS) Comparison

The UPS combines the benefits of the OPS and the NPS. Under the UPS, you can expect:

• Pension: 50% of the OPS benefit plus an annuity derived from a smaller NPS-like corpus.

For Ashish:

• OPS portion: 50% of Rs 32,500 = Rs 16,250
• NPS-like annuity: Rs 13,800

Combining these:

• Monthly pension: Rs 16,250 + Rs 13,800 = Rs 30,050

Thus, under the UPS, Ashish would receive a monthly pension of approximately Rs 30,050, offering a comprehensive and enhanced retirement solution.

Please be aware that the Department of Expenditure (DoE) within the Ministry of Finance is set to release an operational framework for the Unified Pension Scheme (UPS). This comprehensive framework will provide detailed procedures for various scenarios, including cases involving individuals who retired under the National Pension System (NPS) and made partial withdrawals from their annuity. Consequently, the actual pension calculations may vary based on these guidelines. Stay tuned for updates to ensure you have the most accurate information.