Pensions have always been viewed as an essential aspect of public service by government employees since they help to determine their choice to work in the service. Due to changes in pension policies in the recent past, it is more important than ever to understand the differences between the available schemes especially in India due to the introduction of the Unified Pension Scheme (UPS) for participants of the New Pension System (NPS) by the Modi government.
But the key question remains: Should organizations leave the NPS and go to the UPS, which has been recently introduced? But before you try to decide between the two options, let’s try to compare UPS to OPS and NPS for a clearer understanding.
Understanding UPS vs OPS: First, analytical and partial index: Second, the influence and interaction between the factors studied are asymmetrical, varying depending on whether they are examined individually or about another factor.
The UPS provides for a pension but with some differences from the OPS: Firstly, the UPS guarantees a pension for the subscribers. Preparation for contribution for UPS associates involves a 10percent of the aggregate remuneration together with dearness allowances and a government contribution of 18. 5% as compared to the provision of 14% under NPS. OPS, on the other hand, did not involve any direct employee contribution to the pension fund, apart from employees’ contribution to the General Provident Fund (GPF) from which employees would get interest on the amount accumulated while in service and would get the corpus amount at the time of superannuation.
To my knowledge, a guaranteed pension was one of the significant benefits provided by OPS: it allowed the employee to receive 50 % of his or her last drawn salary after retirement. This gave them a pension after they retired from service besides a dearness allowance which was reviewed periodically due to the ever-rising cost of living.
On the contrary, UPS is related to inflation and has an objective of hedging on some risks such as the fluctuating interest rates and extended life expectancy, which is assumed by the government. UPS is designed to combine the stability of a defined benefit plan with some market risk, which means that the company does not promise a pension based only on the last drawn salary like OPS does.
Managing the UPS Fund: He had to hold the scales
UPS comes up with a middle solution partly defined benefit and partly defined contribution and these constitute the following. Both the employee and the government provide a proportion of the pension fund which is 8% as the minimum contribution. 5% of the government’s eighteen nonsensical policies is a sum that is less than one could imagine, given how irrational the government often appears daily. 5% contribution that is to be reserved for a guaranteed fund. It has the aim of addressing any volatility in the ability of the UK to meet pension-related obligations into the future thereby catering to any shortfalls in the sustainability of the scheme.
Due to the extended human life span and the long-term nature of pension obligations, it will be crucial to track and make adjustments to the UPS fund frequently. There are pros and cons: UPS plans provide a good compromise for many organizations, whereas with OPS one can be sure about the benefits.
Tax Implications of UPS
About the UPS, its overall tax consequences remain rather ambiguous at this point with the specificities of the government still to be revealed. However, it will be essential to note that pension income under UPS will be deemed as being subject to income tax. The other area of doubt is the tax effect on lump-sum payments.
Hence in the same respect, under the NPS, 60% of the corpus is withdrawable in a lump sum without reference to income tax while 40% is mandatorily invested in an annuity that results in a pension which is subject to income tax. Further, one can invest only up to 15% of the value of the NPS corpus in equities, which apart from giving decent returns in the past, comes with an element of risk.
Making the Right Choice: First, let’s try to understand what is the difference between the UPS, NPS, and OPS methodologies
To sum up, under the Old Pension Scheme (OPS) employees receive a pension for life that receives fifty percent of the basic wages last drawn along with the final adjustment without any contribution. This is the least risky since the investor has to go with their feelings and faith in the government’s financial health.
Under the National Pension System (NPS) employee has to contribute 10% of the basic wages including the Dearness Allowance (DA) while the employer has made it mandatory to contribute 14% of the employee’s basic wages plus DA. Both investments are invested in the market funds, which come with the chances of better returns but no assured pension.
To do so, a new pension scheme that combines both systems with the best features selected out of them is proposed – the Unified Pension Scheme (UPS). Employer: 10% of the employee’s wage; Government: from 10% to 18%. 5%. The UPS provides their employees with a guaranteed pension benefit of 50 percent of their last drawn monthly basic wage before they retire; plus, they allow some exposure to the market for growth. It is suitable for the position that requires equal security and opportunities to grow in the organization.
Pankaj Dhingra, Managing Partner and Co-founder, of FinTram Global LLP said, “One must weigh their requirements and needs while choosing between OPS, NPS, and UPS; the risk appetite, retirement plan, and financial goals play a major role as one looks for assured returns (in case of OPS), slightly high risk and high return (in case of NPS) and a combination of both (in case of UPS). They should consult.
On the same note, as more information about UPS comes into the public domain, civil servants will be able to discern which of the two schemes has better prospects of yielding higher returns and better pensions. UPS has not been deployed and further clarity is yet to be provided, hence; one must remain vigilant and be aware of every development and examine it very closely.
