Unified Pension System
The Narendra Modi-led government has approved a new pension scheme, the Unified Pension Scheme, which will come into effect in the next fiscal year, i.e. FY2025-26. After facing much criticism for removing the Old Pension Scheme, the NDA government has introduced the Unified Pension Scheme, which amalgamates the advantages of the previous Old Pension Scheme and the features of the New Pension Scheme.
The defined assured pension, also known as a fixed pension amount, guarantees a specific and predetermined sum of money that a retiree will receive regularly after retirement. This pension provides financial stability and security for individuals post-retirement.
The newly approved scheme ensures that Central government employees will receive 50% of their last drawn salary from the past 12 months as their pension. Additionally, those employees who serve a tenure exceeding 25 years will be eligible for post-retirement inflation-linked increments.
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Information & Broadcasting Minister Ashwini Vaishnaw on Saturday said: “There have been demands from government employees to reform NPS (New Pension Scheme)… PM Narendra Modi formed a committee in April 2023 on this under T V Somanathan (who was then finance secretary)… After extensive consultations and discussions, including with the JCM (Joint Consultative Mechanism), the committee has recommended the Unified Pension Scheme. Today, the Union Cabinet has approved the scheme.”
Here are the key features of the Unified Pension Scheme:
1. Under the Unified Pension Scheme, there will be a provision of a fixed assured pension, unlike the New Pension Scheme (NPS) which does not promise a fixed pension amount.
2. Under this scheme, individuals will be eligible to draw 50% of their average basic pay earned during the last 12 months preceding retirement. To qualify for this benefit, individuals must have completed a minimum of 25 years of service.
3. The Unified Pension Scheme has five pillars: Assured Pension, Assured Family Pension, Assured Minimum Pension, Inflation Indexation, and Gratuity
4. Assured Pension: Under the Unified Pension Scheme (UPS), the fixed pension amount awarded will be 50% of the average basic pay received during the last 12 months before retirement for individuals with a minimum qualifying service of 25 years. This pension amount will be adjusted proportionately for individuals with lesser years of service, with a minimum of 10 years of service being required to qualify for the pension.
5. Assured Family Pension: The retirement benefits package includes an assured family pension, amounting to 60% of the employee's basic pay. This pension will be disbursed promptly in the event of the employee's passing.
6. Assured Minimum Pension: In the situation of superannuation following at least 10 years of service, the Uniform Pension System (UPS) includes a guarantee of a minimum pension amounting to Rs 10,000 per month.
7. Inflation Indexation: The indexation benefit is a provision that applies to assured pension, assured family pension, and assured minimum pension. This benefit ensures that these pensions are adjusted to keep up with inflation and changes in the cost of living over time. When indexed, these pensions are periodically reviewed and adjusted to maintain their real value and purchasing power for the beneficiaries.
8. Gratuity: Upon superannuation, an employee is entitled to receive a lump-sum payment along with gratuity. This lump-sum payment is calculated as 1/10th of the monthly emolument (pay + dearness allowance), which includes both pay and dearness allowance, as of the superannuation date for every six months of completed service. Importantly, this payment does not diminish the amount of assured pension the employee will receive.
9. The UPS is designed to provide financial security and support to employees even after their demise. It guarantees 60% of the pension to be immediately transferred to the employee's family as a family pension, similar to the benefits offered by OPS. Additionally, after completing 10 years of service, employees under the UPS are assured a minimum pension of Rs 10,000 per month.
10. It's important to note that the UPS differs from the Guaranteed Pension Scheme proposal that was under consideration by the Andhra Pradesh government. The proposed Guaranteed Pension Scheme aimed to provide a pension amounting to 33% of the last drawn salary to employees.
National Pension System (NPS)
First floated in January 2004, the National Pension Scheme (NPS) was initially established as a retirement plan exclusively for government employees, but in 2009, it was expanded to cover all sectors. Governed jointly by the government and the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is a long-term, voluntary investment program designed for retirement purposes.
> The NPS offers a pension alongside the potential for considerable investment growth. Upon reaching retirement age, subscribers have the choice to withdraw a portion of their accumulated savings, while the remaining sum is distributed as a monthly income, ensuring a regular income stream post-retirement.
> The National Pension Scheme comprises two tiers: Tier 1 accounts and Tier 2 accounts. Tier 1 account holders can only withdraw funds after retirement, whereas Tier 2 accounts allow for early withdrawals, providing more flexibility for investors.
> Under NPS, individuals are eligible to withdraw 60% of the total corpus accumulated during their active employment years upon reaching retirement age, and this withdrawal is exempt from taxation. The remaining 40% is typically utilised to purchase an annuity product, which presently offers a pension amounting to around 35% of the individual's final salary before retirement.
> Under Section 80 CCD of the Income Tax Act, individuals can avail tax benefits by investing in the National Pension System (NPS) up to a maximum limit of Rs 1.5 lakh.
> Furthermore, withdrawing 60 percent of the NPS corpus upon retirement can be done tax-free, making it an attractive option for retirement planning. This feature offers the potential for a lump sum payout, adding to its appeal as a retirement savings vehicle.
Old Pension System(OPS)
So, every time the government increases your Dearness Allowance, the government also hikes the Dearness Relief for retirees.
Under the regulations, OPS guarantees that upon retirement, an employee will receive 50% of their salary as a pension. Within OPS, there is a mechanism in place known as the General Provident Fund (GPF), which enables employees to set aside a portion of their income. This amount is later repaid with accumulated interest upon their retirement.
Moreover, within OPS, employees are entitled to a gratuity payment of a maximum of Rs 20 lakh.
Payments facilitated by OPS are executed through the government treasury, ensuring that pensions are directly financed by the government. Should a retired employee pass away, their family receives continued pension benefits. Noteworthy is the fact that no deductions are made from an employee's salary for the purpose of pension contributions under OPS.
A mix of features
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.
Under the Official Pay Structure (OPS), the pension given to government employees, both at the central and state levels, was determined to be 50 percent of their last drawn basic pay, similar to the structure in the Universal Pay Structure (UPS). Furthermore, a Dearness Allowance (DA) was included, calculated as a portion of the basic salary, to compensate for the consistent rise in the cost of living.
