UPS to NPS: Opt for NPS if service tenure is long and volatility manageable

Those who have a low risk appetite, prefer predictability, or are approaching retirement should stick to UPS

The finance ministry has permitted a one-time, irreversible switch from the Unified Pension Scheme (UPS) to the National Pension System (NPS) for central government employees. The option can be exercised up to one year before superannuation or three months before the deemed retirement date in the case of voluntary retirement.

 

NPS: Growth and flexibility 

NPS permits equity allocation of up to 75 per cent till the age of 50 under the Active Choice option. “Employees can possibly get better returns over 20–30 years in NPS,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.

 

“Over time, compounding at even 10–11 per cent can create a substantially larger retirement corpus than UPS,” says Ajay Kumar Yadav, certified financial planner, chief executive officer and chief investment officer (CEO and CIO), Wise Finserv.

 

NPS offers flexibility, including four free switches per year, a choice of fund managers, and no exit load or capital gains tax when reallocating. Employees can pick between Auto Choice and Active Choice for asset allocation.

 

At retirement, 60 per cent of the corpus can be withdrawn tax-free, while 40 per cent must be used to buy an annuity. “The Systematic Lump Sum Withdrawal (SLW) feature provides further flexibility by allowing retirees to draw a monthly income from their tax-free corpus while staying invested,” says Yadav. The option to continue in NPS up to age 75 allows more time for the corpus to compound.

 

The government’s 4 per cent contribution differential is credited to the NPS corpus at the time of exit from UPS. “This additional contribution becomes part of the employee’s retirement savings and grows in line with market returns over time, possibly enhancing the final corpus value,” says Kumar. 

 

“When you model the full picture — the contributions, expected returns, tax-free lump sum, systematic lump sum withdrawal, and annuity choices — NPS generally scores over UPS,” says Yadav.

 

Loss of assured benefits 

Switching to NPS, however, means losing the assured pension of 50 per cent of the average basic salary in the last 12 months, the guaranteed minimum pension of about ₹10,000 a month, and inflation-linked dearness allowance adjustments. Spouses lose family pension benefits of 60 per cent of the pension, along with gratuity and lump sum entitlements.

 

“This switch eliminates all certainty-based payouts and replaces them with market-linked returns,” says Kumar.

 

NPS exposes the corpus to market fluctuations in the interim. Unlike UPS, which offers inflation-adjusted benefits, NPS annuity payments remain fixed for life, potentially reducing purchasing power over time. 

 

Who should move 

Strong market performance over long periods can generate substantially higher returns in NPS than in UPS. “Younger recruits and mid-career employees, who have a longer period of active employment ahead, can benefit from market-linked growth,” says Sachin Jain, managing partner, Scripbox.

 

Those comfortable with market volatility, asset allocation, and prepared to opt for Active Choice are best placed to gain.

 

Who should stay put 

Employees nearing retirement should avoid a switch to a market-linked instrument.

 

“If market swings make you restless and you do not want to engage with your investments, UPS may suit you better,” says Yadav.

 

Employees who prefer guaranteed payouts and predictable cash flows should stick to UPS. “Those who have already accumulated a large pension corpus and do not wish to chase growth at any cost might also prefer UPS,” says Jain.

 

Finally, employees must heed their risk appetite before switching. And once they move to NPS, they cannot go back to UPS.