The Unified Pension Scheme bill was passed by the Cabinet on Saturday 24th Aug 2024 approving the Unified Pension Scheme (UPS) for 23 lakh central government employees, a modification of the NPS meant only for government employees. So, through this post, let’s try to DECODE it through a conversational dialogue between 2 people namely – Amit & Priya.
Amit: Hey Priya, did you hear about the new Unified Pension Scheme the Cabinet just approved?
Priya: Yes, I did! It’s quite a significant change for central government employees. What are your thoughts on it?
Amit: Well, it’s a big shift from the National Pension System (NPS) we’ve had since 2004. The UPS seems to bring back some elements of the old pension system.
Priya: That’s right. From what I understand, the UPS ensures all central government employees receive 50 percent of their last drawn salary from the past 12 months as pension who have served for 25 years or more. Additionally, they will also be eligible for post-retirement inflation-linked increments in their pension amount. That’s a pretty attractive offer, don’t you think?
Amit: Absolutely. It provides a sense of security, especially with the post-retirement inflation-linked increments. While the UPS offers a more structured and predictable pension plan, the NPS is market-driven and offers flexibility. But I’m curious about how it compares to the potential returns from NPS in the long run.
Priya: That’s an interesting point. Let’s delve further into this. If NPS had been implemented as originally designed, with a substantial part invested in equity, it could have provided much higher pensions – like 200-400% more than the old system!
Amit: Wow, that’s a significant difference. What went wrong with the NPS implementation?
Priya: There were two main issues. First, from 2004 to 2009, the NPS funds were not invested at all and they just earned the government securities rate. Then some rules and modifications were made, even after that, the maximum equity exposure was limited to only 15% by default.
Amit: That seems like a missed opportunity, especially considering how much the stock market has grown. The BSE Sensex went as high as 6,954.86 for the FY 2004 – 05 (Source: BSE India website), and now it’s about 80,000+ considering this fact it has grown mathematically at an annualized rate of 12.99% per annum in the last 20 years.
Priya: Exactly. It looks like the fear of equity investments hindered the potential of NPS. Still, some government employees who understand this can opt for higher equity exposure in their NPS accounts.
Amit: That’s good to know. But now with UPS coming into effect from April 1, 2025, what happens to our existing NPS accounts?
Priya: From what I gather, we’ll have the option to choose between UPS and NPS from the next financial year.
Amit: I see. What about the basic difference between NPS and UPS funds?
Priya: That’s an important point. Under NPS, we could take 60% of the accumulated amount and had to invest 40% in an annuity. With the UPS the entire pension wealth will have to be foregone to the government.
Amit: That sounds like a significant change. What do we get in return?
Priya: Under UPS, the government will give us 10% of our emoluments (basic pay plus DA) for every completed six months of service. So, for 25 years of service, we’d get five months’ emoluments, and for 10 years, we’d get two months’ pay on retirement. This is in addition to gratuity.
Amit: Interesting. It seems like there are pros and cons to both systems. The guaranteed pension in UPS is attractive, but the potential for higher returns in NPS, if invested properly in equity, is also compelling.
Priya: True. For non-government NPS members, maximizing equity exposure for as long as possible is key to getting the best returns. It’s a principle that applies to all long-term investing, not just to the NPS to beat the INFLATION – the HIDDEN THIEF.
Amit: This is certainly a lot to think about. It seems like we’ll need to carefully consider our options when the time comes to choose between UPS and NPS.
Priya: Absolutely. It might be worth consulting a financial advisor to understand how these changes will affect our retirement plans.
Amit: Good idea. Thanks for discussing this with me, Priya. It’s helped me understand the new pension scheme better.
Priya: You’re welcome, Amit. It’s an important decision that will affect our financial future, so it’s good to be well-informed.
Will work on providing more information in times to come as I gather more information on this in Part 2.
Simplified Money Talks 