Since the Unified Pension Scheme (UPS) announcement, several readers have asked me if I would opt for UPS. In this article, I explain why I prefer the NPS (National Pension Scheme) to the UPS,
I have discussed a simple thumb rule to decide between the Unified Pension Scheme and the National Pension Scheme and also published a calculator based on this logic. This calculator also compares the UPS and NPS schemes.
Let us look at this issue from a slightly different angle. Determine your monthly expenses that will continue in retirement (exclude expenditures for parents, children and EMIs). Let us denote this as E.
How does ‘E’ compare with ‘B’, your current basic pay (excluding DA)?
If E is much lower than B, your salary is comfortably large (for your lifestyle). This also means you can invest a good amount for retirement in instruments other than NPS (if you appreciate the importance of retirement planning!).
If your salary is high, the minimum guaranteed pension from UPS will also be high, as will your NPS corpus. If you also factor into your other investments, your withdrawal rate (annual expenses divided by total retirement corpus) will be quite low (than the “standard” 4%).
You are not dependent on the UPS pension. If you wish to use UPS, it will only be one component of your retirement portfolio to create a guaranteed income floor; for details, see Creating the Ideal Retirement Plan with Income Flooring!
This is the case with me. My current withdrawal rate (you can use the calculator linked above to determine yours) is well below the 3.5% limit set in the tool. I expect my future withdrawal rate to be smaller if I retire as expected.
Therefore, it makes sense for me to stay in the NPS without opting for the UPS (I am assuming they will continue the Central Government NPS scheme!) This gives me access to 60% of the NPS corpus. I can always create an income floor with the mandatory 40% of the corpus.
Also, having seen my NPS corpus grow from zero to hero over 18 years, I am emotionally attached to it, and I do not wish to lose control over that.
As I write this, I fully appreciate that this will not be the case for many government employees, especially when E is comparable or higher than B. If the salary is low, and investments in other instruments are low or zero, then the dependence on the NPS corpus will be high. In many such cases, UPS could make better sense.
The only point I wish to convey is that we should not simply compare products and decide which is better. Look at your circumstances holistically and choose which would be better for you.
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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.
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