Understanding India’s Pension Schemes: OPS, NPS, and UPS Explained

The landscape of pensions in India has undergone significant changes over the past few decades. While the Old Pension Scheme (OPS) has long been recognized as a cornerstone of retirement planning for government employees, newer alternatives like the New Pension System (NPS) and the upcoming Unified Pension Scheme (UPS) are reshaping how future retirees will secure their financial futures. This article outlines the salient features and calculations associated with each of these pension schemes.

Old Pension Scheme (OPS)

The Old Pension Scheme, established during British rule in the 19th century, has undergone multiple transformations throughout its existence. It officially received its most recent form following India’s independence. In a key development, the retirement age under OPS was raised from 58 to 60 years in 1998. However, following the restructuring of retirement benefits, the central government discontinued OPS for its employees after 2003. While most Indian states have also phased out OPS, West Bengal remains one of the few exceptions, and several states have recently reintroduced the scheme, often aligning this decision with their election manifestos.

Pension Calculation under OPS

The calculation for pensions under OPS requires a minimum of 10 years of service. Notably, an employee does not need to contribute to any fund to receive their pension. Instead, OPS pensions are based on a straightforward formula: employees receive 50% of the average basic salary calculated from their last 10 months of service.

For instance, consider an employee with a last-drawn basic pay of ₹70,000 and 20 years of service. The basic monthly pension would amount to ₹35,000, not including dearness relief. The family pension would be set at ₹21,000 under the same salary conditions and tenure.

New Pension System (NPS)

Launched on January 1, 2004, the New Pension System represents a shift towards a more market-driven retirement strategy. It applies to central government employees who joined after this date. Unlike OPS, where pensions are guaranteed, NPS ties the pension returns to the contributions made by employees and the performance of market-linked investments.

Under NPS, employees contribute 10% of their basic pay towards their pension fund, with the government adding an additional 14%. Upon reaching retirement age (60), employees can withdraw 60% of their corpus as a lump sum and must use the remaining 40% to purchase an annuity plan, which provides their monthly pension based on the performance of their investment portfolio.

Pension Calculation under NPS

For example, if an employee with a last-drawn basic pay of ₹70,000 contributes ₹5,000 monthly (with a future increment of 5% yearly) over 20 years, with an investment portfolio consisting of 75% equity and 25% debt, they could expect an estimated monthly pension of ₹10,610. ## Unified Pension Scheme (UPS)

The Unified Pension Scheme, set to roll out on April 1, 2025, promises a more assured pension for employees, featuring a combination of guaranteed and market-linked benefits. In this scheme, employees will contribute 10% of their basic pay while the government will contribute 18.5%, leading to a total contribution of 28.5%. Funds will be allocated with 20% going towards market-linked schemes and 8.5% to fixed-return investments to secure a minimum pension.

Pension Calculation under UPS

UPS guarantees a minimum pension of ₹10,000 after 10 years of service, escalating to a payout of 50% of the last-drawn average basic pay for those with at least 25 years of service. For an employee earning a last-drawn basic pay of ₹70,000 and having 20 years of service, the minimum assured monthly pension would be ₹42,840, including dearness relief, while the family pension would be ₹25,704. Additionally, the lump sum amount payable upon retirement in such a scenario would approximately reach ₹4,28,400. ## Implications of Market Performance on UPS

A unique aspect of the Unified Pension Scheme is its safety net concerning market fluctuations. If the market-linked investments underperform, the government assures a minimum pension amount. Conversely, if these investments perform well, employees could receive a higher pension than the guaranteed minimum.

Conclusion

With the introduction of NPS and the impending launch of UPS, the traditional pension landscape in India is evolving rapidly. Each scheme offers unique features that cater to different employee needs, reflecting a shift towards more flexible and market-sensitive retirement solutions. Understanding these options is crucial for employees as they navigate their future financial security.