The Unified Pension Scheme (UPS) under the National Pension System (NPS) will be implemented from April 1, 2025. With guaranteed pension benefits, government contributions, and investment flexibility, UPS aims to provide financial security for central government employees post-retirement.
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As the rollout approaches, financial experts share insights on how it will work and what employees should expect.
Guaranteed pension based on service tenure
UPS offers a structured pension payout based on the number of years an employee has served. Those with 25 years or more of service will receive 50% of their last 12 months’ average basic salary as a pension.
Employees who have completed 10-25 years of service will get a proportionate pension, ensuring that longer service leads to higher payouts.
For employees who have completed at least 10 years of qualifying service, there is a minimum guaranteed pension of ₹10,000 per month.
Saurabh Bansal, Founder, Finatwork Investment Advisor, a SEBI RIA, said, “The biggest benefit of UPS is the guaranteed pension, ensuring financial stability after retirement. The scheme is designed to provide a reliable income source, giving employees peace of mind.”
Additionally, Prashant Mishra, Founder & CEO of Agnam Advisors, noted that UPS offers retirees more predictability than NPS.
“UPS ensures a predictable monthly pension, providing retirees with financial stability, unlike NPS, which carries post-retirement income uncertainty,” he said.
Government contributions and investment options
Under UPS, employees must contribute 10% of their basic salary plus dearness allowance (DA), and the government will match this contribution, leading to a total 20% investment.
These contributions will be invested in default schemes prescribed by the government, but employees can also choose to invest with private pension fund managers (PFMs).
Rajesh Khandagale, Senior Vice President, NPS, KFin Technologies, emphasised the importance of private PFMs in the scheme.
“As private PFMs are included, employees will have more investment choices. The flexibility allows individuals to select investment options that align with their financial goals,” he said.
Additionally, an extra 8.5% contribution will be invested in a common pool corpus, which will be managed by selected fund managers based on their performance.
Inflation protection with DA adjustments
A key advantage of UPS is its linkage to DA, which will ensure that pension payouts increase over time to counteract inflation.
Unlike many traditional pension plans where fixed payouts lose value over time, UPS ensures that retirees maintain their purchasing power.
Bansal pointed out, “This ensures pensioners maintain their standard of living and do not see a decline in real income due to inflation.”
Financial security for spouses and survivors
UPS also provides continued financial security for the spouse of the pensioner.
In case of the retiree’s demise, the spouse will receive 60% of the pension amount.
“The spouse’s entitlement to 60% of the pension ensures that even after the pensioner’s demise, financial support remains intact. This is a crucial element of UPS, providing stability to retirees’ families,” Bansal added.
How pension withdrawals will work
Once an employee retires, the pension will be drawn from their accumulated corpus, similar to a systematic withdrawal plan (SWP) in mutual funds.
This means pensioners will receive regular payouts while their remaining funds stay invested.
If the corpus depletes before the pensioner or their spouse passes away, payments will continue from a government-managed common pool, ensuring that they do not run out of funds.
Khandagale explained this structure: “This ensures lifetime pension security, even if an individual’s corpus runs out. The mechanism allows retirees to continue receiving pension payments without worrying about outliving their savings.”
State government employees and UPS adoption
Currently, UPS is applicable only to central government employees.
State governments must decide individually whether they want to implement the scheme for their employees.
Many states are expected to evaluate the benefits of UPS before making a decision.
“We still need clarity on how state governments will adopt UPS. While the structure looks promising, states will need to weigh the financial implications before implementing it,” Khandagale noted.
Challenges and exclusions
While UPS offers several advantages, annuity service providers (ASPs) are excluded from the new system, which will impact their role in pension fund management.
Additionally, the specific investment strategy for the additional 8.5% common pool fund is yet to be finalised.
The government is expected to provide more details in the coming months.
What employees should do next
Eligible employees can enrol in UPS starting April 1, 2025, through the Protean CRA portal (npscra.nsdl.co.in). They also have the option to submit physical forms.
