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Explained: Unified Pension Scheme

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Inspiration Study Circle Explained: Unified Pension Scheme

The Cabinet has approved the Unified Pension Scheme (UPS) for government employees, replacing the Old and the New pension schemes. Under the new scheme, employees who complete at least 25 years of service will receive 50% of their basic payment as a pension. Additionally, those with at least 10 years of service will receive a minimum pension of ₹10,000.

This move aims to provide a more standardized and comprehensive pension plan, offering greater financial security to government employees. The implementation of UPS is expected to streamline pension benefits and enhance the overall retirement security for the workforce.

The newly approved Unified Pension Scheme (UPS), set to provide an assured pension to 23 lakh eligible central government employees, will bring an additional financial burden of Rs 6,250 crore per year to the exchequer. Effective April 1, 2025, the UPS will increase the government’s contribution from the current 14 percent to 18.5 percent.

Despite the government’s increased contribution, employees’ contribution will remain unchanged at 10 percent of their basic salary. Additionally, employees retiring before March 31, 2025, under the National Pension System (NPS), will receive an arrear of Rs 800 crore if they opt for UPS.

Explained: Unified Pension Scheme
Explained: Unified Pension Scheme

Features of UPS (Unified Pension Scheme)

Implementation Date

Effective from April 1, 2025.

Eligibility

Central government employees with at least 10 years of service.

Assured Pension

  • 50% of average basic pay over the last 12 months before retirement for employees with 25+ years of service.
  • Proportionate benefits for 10-25 years of service.

Assured Minimum Pension

₹10,000 per month for employees with at least 10 years of service.

Assured Family Pension

60% of the pension that the employee was drawing before their death.

Inflation Protection

  • Pensions indexed to inflation;
  • Dearness Relief (DR) based on the All India Consumer Price Index for Industrial Workers (AICPI-IW).

Government Contribution

18.5% of basic pay and DA, increased from 14% under the National Pension System (NPS).

Employee Contribution

10% of basic pay and DA (same as under NPS).

Lump Sum Payment on Superannuation

One-tenth of the last drawn monthly pay (including DA) for every 6 months of completed service, in addition to gratuity.

Option to Choose

Employees can choose between UPS and NPS starting from the upcoming financial year; the choice is final once made.

Beneficiaries

  • Initially benefits 23 lakh central government employees;
  • May extend to 90 lakh if adopted by state governments.

Difference from NPS

Unlike the market-dependent NPS, UPS provides a guaranteed pension amount, a minimum pension, increased government contribution, a fixed family pension, and a lump sum payment at superannuation.

What was the Old Pension Scheme in India?

The Old Pension Scheme in India also referred to as the Defined Benefit Pension Scheme was a retirement benefit program that was prevalent for government employees before the implementation of the National Pension System (NPS) in 2004. Here are the key features of the Old Pension Scheme:

  1. Defined Benefits: Employees enrolled in the Old Pension Scheme were entitled to receive a fixed pension amount upon retirement. The pension amount was determined based on factors such as the employee’s years of service and the last drawn salary.
  2. Contributions: Unlike the NPS, where employees contribute a portion of their salary towards their pension fund, participants in the Old Pension Scheme did not make any financial contributions. Instead, the entire financial burden was borne by the government.
  3. Family Pension: In the event of the employee’s demise, the Old Pension Scheme provided for a family pension to be granted to the spouse or dependent family members, offering some financial security to the employee’s loved ones.
  4. Government Liability: The Old Pension Scheme placed a significant financial burden on the government due to the guaranteed pension payouts without any corresponding contributions from the employees. This liability was a major concern for the government in terms of long-term sustainability.
  5. Transition to NPS: With the establishment of the National Pension System (NPS) in 2004, new government employees were brought under the NPS, which operates on a defined contribution basis. The NPS requires both employees and employers to make regular contributions toward the pension fund, with the final pension amount depending on the contributions made and the investment returns.

The New Pension Scheme of 2004

The New Pension Scheme in India, officially known as the National Pension System (NPS), was introduced in 2004 as a replacement for the traditional defined benefit pension schemes, such as the Old Pension Scheme, for government employees. Here are the detailed features of the National Pension System:

  1. Defined Contribution System: The NPS operates on a defined contribution basis, where both employees and employers (in the case of government employees) make regular contributions towards the pension fund during the employee’s working years.
  2. Tiered Structure: The NPS has two main tiers:
    • Tier I Account: This is a mandatory pension account where withdrawals are restricted before retirement. It is aimed at providing a regular income post-retirement.
    • Tier II Account: This is an optional savings account that allows for withdrawals as and when needed, making it more flexible compared to the Tier I account.
  3. Contributions:
    • Employees contribute a portion of their salary towards their NPS account, which is invested in various financial instruments such as equities, government bonds, corporate bonds, and other market instruments.
    • Employers also contribute towards the employees’ NPS accounts, making it a co-contributory scheme in the case of government employees.
  4. Flexible Investment Options: NPS subscribers can choose between different investment options ranging from low-risk to high-risk funds based on their risk appetite. This includes options like equity funds, government securities, corporate bonds, etc.
  5. Portability: One of the key advantages of the NPS is that it is portable across jobs and locations. Subscribers can retain the same NPS account even if they change jobs or move to a different city.
  6. Tax Benefits: Contributions made towards the NPS are eligible for tax deductions under Section 80CCD of the Income Tax Act, providing additional tax benefits to subscribers.
  7. Annuity Options: Upon retirement, subscribers can use the accumulated corpus to purchase an annuity from an Insurance Regulatory and Development Authority (IRDA) regulated insurance provider. This annuity provides a regular income stream post-retirement.
  8. Regulation and Oversight: The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which oversees the functioning of pension fund managers, custodians, and other entities involved in the NPS ecosystem.
  9. Continued Growth: Over the years, the NPS has gained popularity not only among government employees but also among private sector employees and self-employed individuals who seek a structured pension plan for their retirement years.

Difference between UPS, NPS, and OPS

UPS: Only for government employees. Guarantees a pension equivalent to 50% of the average basic salary of the last 12 months. Requires employee contributions of 10% of basic salary plus DA, with the government contributing 18.5%. Includes a separate pooled corpus funded by an additional 8.5% government contribution.

NPS: Available to both government and private sector employees. No guaranteed pension; pension depends on market returns. Employees contribute 10% of their salary, and the government contributes 14%. Allows up to 60% tax-free lump sum withdrawal at retirement.

OPS: Was for government sector employees. Provided a guaranteed pension based on 50% of the last drawn basic salary, with no employee contributions. The government fully funded the pension without requiring investments in market-linked products.

Combination of Features of both OPS and NPS

The new Unified Pension Scheme (UPS) offers a combination of benefits that combine elements from the Older Pension Scheme (OPS) and the National Pension Scheme (NPS).

From the OPS, the UPS incorporates features such as an assured pension, inflation indexation, family pension, and a minimum pension. These aspects provide a sense of security and stability to members post-retirement.

Additionally, the UPS also adopts a key feature from the NPS, which is a contributory, fully funded scheme. This ensures that members have the opportunity to contribute towards their pension fund, leading to a more personalized and potentially higher pension payout upon retirement.

Significance of a Dynamic Pension Scheme in India

The pension scheme in India holds significant importance due to various reasons:

  1. Social Security: The pension scheme provides a form of social security for individuals after retirement, ensuring a regular income to meet their living expenses when they are no longer earning.
  2. Financial Stability: It helps individuals maintain financial stability post-retirement by providing a source of income, reducing the risk of poverty and financial insecurity in old age.
  3. Employee Welfare: For employees, the pension scheme acts as a form of long-term savings, encouraging financial discipline and providing a sense of security for the future.
  4. Government Support: In India, various pension schemes are supported by the government, such as the Employees’ Provident Fund (EPF), National Pension System (NPS), now Unified Pension Scheme (UPS), and Atal Pension Yojana (APY), which aim to provide financial security to different segments of the population.
  5. Economic Impact: Pension schemes contribute to overall economic stability by ensuring that retirees have a steady income, which in turn helps in maintaining consumer spending levels even after retirement.
  6. Reducing Dependency: By providing a regular income to retirees, pension schemes help reduce the dependency of elderly individuals on their families or social welfare systems.
  7. Incentive for Long-term Savings: Pension schemes encourage individuals to save for their retirement years, promoting a culture of long-term financial planning and savings.
  8. Retaining Talent: Employer-sponsored pension schemes can also help in attracting and retaining talent by offering a valuable benefit that supports employees beyond their working years.

In conclusion, pension schemes play a crucial role in ensuring financial security, social welfare, and economic stability for individuals in their post-retirement years in India.

Disclaimer: The above article is based on various sources: Indian Express and Business Today.

 

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