UPS vs NPS vs OPS: Which will offer you the highest pension on Rs 1,10,000 average basic pay, 29 years of pensionable service?

The traditional pension system in India is Old Pension Scheme (OPS), which was launched in 19th-century British India. It transformed many times but remained the sole pension system in India until December 2003. On January 1, 2004, the central government launched NPS, and it became the default option for new employees. After Centre's initiative, most states abolished OPS and switched to NPS. However, in recent times, many states like Punjab, Himachal Pradesh, and Jharkhand have switched back to OPS. In October 2024, the government launched UPS. The scheme is open to central government employees only. 

In the old pension scheme, an employee becomes eligible to get a pension after at least 10 years of service. On completion, the pension is the greater of the two amounts: the average of the sum of 10-month average emoluments (basic pay+non-practicing allowance (NPA)) or the sum of last month's emoluments (basic pay+NPA).

OPS also has the option of a family pension, which is 60 per cent of the pension given to the deceased.  The pensioner can also commute up to 40 per cent of their pension. For which, they get a lump sum amount at retirement and a reduced salary for 15 years.

NPS doesn't offer a fixed pension. Here, the pension depends on the individual and their employer's contribution to the employee's NPS account. The higher the contribution, the larger the pension. NPS account holders can pick equity mutual funds and fixed asset investment options to create a retirement fund. At 60 years of age, they can withdraw up to 60 per cent of their corpus. From the remaining 40 per cent amount, they buy an annuity plan, which provides a monthly pension to them. If the account holder wants, they can purchase the annuity plan from 100 per cent of their corpus.

UPS is a mix of OPS and NPS. OPS, because UPS offers an assured pension of at least Rs 10,000 on completion of 10 years of service. NPS, because UPS account holders have the option to pick linked and non-market-linked investment options, returns from which can increase their pension amount. Like OPS, a UPS accountholder also gets a lump sum amount at retirement. The UPS accountholder also has the option of the family pension, which is 60 per cent of the pension given to the deceased. 

On 25 years of service, the maximum pension is 50 per cent of the 12-month average basic pay and DA immediately prior to retirement. 

We will calculate which system may provide the highest pension to a central government employee whose average 12-month salary immediately prior to retirement is Rs 1,10,000 and whose pensionable service is 29 years. We will calculate the pension at a 55 per cent dearness relief (DR) rate.

Rs 85,250

Rs 51,150

Rs 85,250 (this is the minimum assured pension. The amount can be higher than this based on UPS investment performance. The amount can't be less than this.) 

Rs 51,150

Rs 9,88,900

Since here, the pension depends on contribution and not on the average basic salary, the calculation will be based on NPS account contributions of the accountholder and their employee.  We are creating here a situation where we assume that a person started their NPS contribution with a monthly amount of Rs 7,000 (including the government's portion), where they increased their yearly amount by 5 per cent for 27 years. The estimated average return from their contribution is 9.18 per cent, while the return from annuity investment is 7 per cent.

The total investment in 27 years will be Rs 67,25,357. The estimated gains in 27 years will be Rs 2,09,03,828, while the estimated corpus will be Rs 2,76,29,185. The estimated lump sum withdrawal will be Rs 1,65,77,551, while the annuity estimated value will be Rs 1,10,51,674.  The estimated monthly pension will be Rs 64,468. But if the account holder doesn't withdraw a lump sum amount and purchase an annuity from 100 per cent of their retirement corpus, their lump sum amount will be 0, but their estimated monthly pension will be Rs 1,61,170.