Last Updated on August 26, 2024 at 2:04 pm
With the introduction of the Unified Pension Scheme from 1st April 2025, many NPS government subscribers would ask, Should I switch from National Pension Scheme to the Unified Pension Scheme? Here is a free calculator to find out!
At the time of writing, the full terms and conditions of the Unified Pension Scheme (UPS) are still unclear. So, the suggestions made in this article may change. This is what we know so far.
- Assured pension: 50% of the average basic pay drawn over the last 12 months before superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for a lesser service period up to a minimum of 10 years of service.
- Assured family pension: @60% of employee pension immediately before her/his demise.
- Assured minimum pension: @10,000 per month on superannuation after a minimum of ten years of service.
- Inflation indexation: on assured pension, on assured family pension and assured minimum pension
- Dearness Relief is based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) for service employees. The last 10-year average annual increase is about 5%
- lump sum payment at superannuation in addition to gratuity 1/10th of monthly emoluments (pay + DA) as on the date of superannuation for every completed six months of service without reduction in the quantum of assured pension
- Government NPS subscribers can switch to the UPS. They must transfer most of their NPS corpus to the UPS scheme.
- For UPS subscribers, the monthly employee contribution will be at 10% of basic+ DA, and the government contribution will be 18.5% (variable according to actuarial considerations).
I quickly ran the numbers for a few cases. If the entire NPS corpus is used to purchase the same UPS annuity, the annuity rate (pre-tax) is 7% to 9.8% (depending on salary and service). I have not factored in the inflation-indexed component. That will make the effective annuity rate even higher! Such an annuity product (with inflation indexation close to 5%) does not exist in the market (i.e. with life insurers). Also, see: Is the Unified Pension Scheme sustainable?
However, you can match the inflation-indexed UPS pension if your salary and NPS corpus are large enough.
Download the free NPS vs UPS Calculator!
Version 3: Updated 26th Aug. Solved issue in DA computation after retirement. Now, post-retirement withdrawals from the NPS corpus have a separate return input. Please check back for version updates. For feedback and bug reports, email freefincal [AT ] gmail [DOT ]com
Underlying logic: Can your future NPS corpus provide the same pension expected from UPS (with inflation indexation)? The NPS annuity provides part of this pension. Inflation indexation is provided via systematic withdrawals from the balance NPS corpus (if any!).
If the answer is yes, then stay in NPS. If the answer is no, find out how much the shortfall is. For example, you expect to live 30 years after retirement, and NPS can provide an inflation-indexed pension for 29 years. The shortfall (1Y) is small. NPS and UPS are still comparable. If the shortfall is large (several years), UPS is better than NPS.
So, at first sight, it seems like a no-brainer to switch from the NPS to the UPS. It must, however, be understood that such a pension alone is far from sufficient for a financially independent retirement. Please use the calculator and check for yourself. Let us consider some scenarios.
- Salary is quite low; expenses are relatively high. This typically means investments are low. The NPS corpus is expected to be low. A switch to the UPS may make sense here. However, in the remaining time until retirement, please invest as much as possible to build a nest egg to handle emergencies and inflation. In this case, there is not much of a choice.
- Salary is comfortably high; expenses are not much more than basic pay. If this means a good savings rate, it is a happy scenario with a proper choice. Either choice (UPS/NPS) is quite ‘okay’ as there is enough corpus to play with.
- If you opt for the UPS, it will become an inflation-indexed income floor, lowering the risk of capital market risks on the rest of your corpus. See: Creating the ideal retirement plan with income flooring!
- If you start with the NPS, you can still create an income floor with 40%(or more) of the NPS corpus and invest the rest in a bucket strategy.
- I am emotionally attached to my NPS corpus – Analyzing the growth of my 14-year-old NPS portfolio – so surrendering it to UPS does not appeal to me. However, if the rest of the corpus is large enough, switching to UPS would not be a big loss, considering the annuity rate (if high enough) and inflation indexation.
- UPS has an option for a family pension. However, income flooring with an RBI bond held jointly with the spouse is a superior choice since we will get back the principal. And the pension is constant (family pension is only 60% of the pension)
- NPS allows me the freedom to choose options like annuity laddering. See: Use this annuity ladder calculator to plan retirement with multiple pension streams.
- Based on the above calculator, I would like to stay put in the NPS.
- Salary is neither high nor low: Most people reading this will probably fall here. UPS seems reasonable if the NPS annuity rate needed to match the UPS pension is high enough. You must use the calculator to determine how strong your future NPS corpus is. In any case, the onus is on the employee to invest prudently elsewhere in the remaining time, regardless of their choice.
In summary, as per the available information, my understanding is to compare your current expenses (that will persist in retirement) with your basic pay. UPS seems like a good idea if your expenses exceed your basic or comparable expenses. If your expenses are much lower than your basic or your corpus (excluding NPS) is large enough, you have the luxury of choice.
If your corpus is large enough, you can still consider if UPS can be used as a pension income floor, but it will mean forgoing your NPS corpus (shifting it to UPS), which will not be easy! Please do not be in a hurry to switch. Analyse your situation with exact numbers once the circular comes out, and then take a call. We shall discuss this further as more details emerge.
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
🔥Now Watch Let’s Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)
