Comparison of OPS, NPS, and UPS
Benefits of the Old Pension Scheme (OPS):
- Guaranteed Pension: Employees receive a fixed pension after retirement, usually 50% of their last drawn salary, ensuring financial security.
- Government-Funded: The pension is fully funded by the government, with no contribution required from the employee during their service.
- Inflation-Linked Pension: Pensions are periodically revised based on inflation, ensuring that retirees maintain their purchasing power over time.
- Lifetime Benefit: The pension continues for the lifetime of the employee, with provision for the spouse to receive a family pension after the employee’s death.
- No Market Risk: Unlike the National Pension System (NPS), where pension returns depend on market performance, OPS offers a stable and guaranteed pension, unaffected by market fluctuations.
- Commutation Option: Employees can opt for a portion of their pension as a lump sum at the time of retirement, with a reduced pension thereafter.
- Gratuity: In addition to the pension, retirees receive a lump sum gratuity amount based on their service period and last drawn salary.
- General Provident Fund (GPF): Employees under OPS contribute to the GPF, which provides them with a lump sum at retirement, including accrued interest.
- Family Pension: After the pensioner’s death, the spouse is entitled to a family pension, ensuring financial support for dependents.
- No Employee Contribution: Unlike NPS, where employees contribute toward their pension, OPS requires no such contributions, making it less financially burdensome during the working years.
- Financial Stability in Retirement: The OPS provides long-term stability and peace of mind, as retirees are assured of a regular income.
These benefits made OPS a desirable scheme for government employees, offering long-term security without the risks associated with market-linked pensions like NPS.
The General Provident Fund (GPF) is only applicable to employees under the Old Pension Scheme (OPS). It is not applicable for those under the National Pension System (NPS) or the Unified Pension Scheme (UPS). Let’s go over the details:
1. Old Pension Scheme (OPS)
- GPF Applicability: Yes, GPF is applicable to employees under the Old Pension Scheme.
- Employee Contribution: Employees generally contribute 6-12% of their basic salary to the GPF.
- Interest Rate: The interest rate on GPF is set by the government, typically around 7-8%.
- Lump Sum Payment: At the time of retirement, employees receive the total of their contributions along with the interest accumulated over the years.
Example GPF Calculation for OPS:
Let’s assume:
- Basic salary X = ₹50,000.
- Contribution rate: 10% of basic salary.
- Service period: 30 years.
- Interest rate: 8%.
The annual contribution to GPF will be:
Annual Contribution=0.1×X×12=₹60,000
Using compound interest, the formula to calculate the GPF corpus at retirement is:
GPF Corpus=P×(1+r)n−1r×(1+r)\text{GPF Corpus} = P \times \frac{(1 + r)^n – 1}{r} \times (1 + r)
Where:
- P=₹60,000P = ₹60,000 (annual contribution),
- r=0.08r = 0.08 (interest rate),
- n=30n = 30 (years of service).
Let me calculate this.
GPF Calculation for OPS:
For an employee with a basic salary of ₹50,000, contributing 10% of the salary to GPF for 30 years at an 8% interest rate, the total GPF corpus at retirement will be approximately ₹73,40,752.
Applicability to Other Schemes:
- National Pension System (NPS): GPF is not applicable under NPS.
- Unified Pension Scheme (UPS): GPF is not applicable under UPS.
Corpus at Retirement for All Schemes:
Old Pension Scheme (OPS):
- Corpus at Retirement: N/A (No corpus accumulation in OPS).
National Pension System (NPS):
- Corpus at Retirement: ₹1,76,17,805 (after 30 years with 8% annual return).
Unified Pension Scheme (UPS):
- Corpus at Retirement: ₹2,09,21,143 (after 30 years with 8% annual return).
These calculations show the accumulated corpus for NPS and UPS based on employee and employer contributions over 30 years.
In the Unified Pension Scheme (UPS), the withdrawal of corpus is not allowed in the same way as in the National Pension System (NPS).
Key Points for UPS:
- Guaranteed Pension: The UPS guarantees a fixed pension of 50% of the average basic pay drawn in the last 12 months before retirement.
- No Corpus Withdrawal: Unlike NPS, where up to 60% of the corpus can be withdrawn as a lump sum at retirement, UPS does not provide this flexibility.
- Lump Sum Payment: There is, however, a provision for a lump sum payment at retirement, calculated as 1/10th of the monthly emoluments (basic salary + DA) for every six months of service. This lump sum does not reduce the pension.
So, the UPS does not allow direct withdrawal from the accumulated corpus at retirement, but instead provides a guaranteed pension and a separate lump sum payment.
Let’s calculate the corpus withdrawal for each scheme based on their respective rules.
1. Old Pension Scheme (OPS)
- Corpus Withdrawal: Not applicable. The OPS does not have a corpus accumulation model. Instead, the employee receives a guaranteed pension and gratuity, and the accumulated GPF is paid out at retirement.
- Corpus Withdrawal = N/A for OPS.
2. National Pension System (NPS)
- In NPS, the employee can withdraw up to 60% of the corpus as a lump sum at retirement.
- The remaining 40% must be used to purchase an annuity to provide a regular pension.
From the previous calculations, we know the total corpus at retirement under NPS is:
Total Corpus (NPS)=₹1,76,17,805
-
Lump Sum Withdrawal (60%):
Lump Sum Withdrawal=0.6×₹1,76,17,805=₹1,05,70,683
Annuity Purchase (40%):
-
Annuity Purchase=0.4×₹1,76,17,805=₹70,47,122
3. Unified Pension Scheme (UPS)
- Corpus Withdrawal: Not allowed under UPS. The scheme does not permit withdrawal of the accumulated corpus like in NPS.
- Lump Sum Payment: Instead, there is a lump sum payment calculated as 1/10th of the monthly emoluments (basic salary + DA) for every six months of service.
For X = ₹50,000 (basic salary) and 30 years of service, the lump sum payment is:
Lump Sum Payment (UPS)=110×X×(30×2)=0.1×50,000×60=₹3,00,000
Corpus withdrawal and lump sum payment are two distinct concepts, and here’s how they differ:
1. Corpus Withdrawal (Applicable in NPS)
- Definition: This refers to the amount an employee can withdraw from the total accumulated pension corpus at retirement.
- NPS: In the National Pension System, you can withdraw up to 60% of the total corpus as a lump sum, and the remaining 40% must be used to buy an annuity to ensure a regular pension.
- Nature: This withdrawal comes directly from the pension contributions and investment growth over the years.
2. Lump Sum Payment (Applicable in UPS)
- Definition: A fixed lump sum payment is an amount paid out in addition to the pension, based on certain predefined rules.
- UPS: In the Unified Pension Scheme, the lump sum is a fixed amount (e.g., 1/10th of the last drawn emoluments for every six months of service) and does not come from the total corpus like NPS. It is separate from the pension corpus.
- Nature: This payment is more like a one-time benefit given at retirement and does not impact the guaranteed pension amount.
Key Difference:
- Corpus Withdrawal (NPS): Directly linked to the amount saved in the pension fund. Reduces the available corpus for purchasing annuities.
- Lump Sum Payment (UPS): A separate payment that does not reduce or affect the pension corpus or monthly pension.
Let’s calculate the pension for each scheme (OPS, NPS, and UPS) based on the rules of each scheme.
1. Old Pension Scheme (OPS):
- Pension: In OPS, the pension is 50% of the last drawn basic salary.
For X = ₹50,000:
Pension (OPS)=0.5×₹50,000=₹25,000 (per month)
2. National Pension System (NPS) (With 60% Corpus Withdrawal):
- In NPS, after withdrawing 60% of the corpus, the remaining 40% of the corpus is used to purchase an annuity, which provides a pension.
- Annuity Purchase: The 40% remaining corpus is used to buy an annuity at a 6% annuity rate (a common assumption).
From previous calculations:
- Total Corpus (NPS): ₹1,76,17,805
- Annuity Purchase (40%): ₹70,47,122
The annual pension is calculated as:
Annual Pension (NPS)=0.06×₹70,47,122=₹4,22,827
The monthly pension will be:
Monthly Pension (NPS)=₹4,22,82712=₹35,236
3. Unified Pension Scheme (UPS) (No Withdrawal Allowed):
- In UPS, there is no corpus withdrawal. Instead, the scheme provides a guaranteed pension of 50% of the last drawn basic salary.
For X = ₹50,000:
Pension (UPS)=0.5×₹50,000=₹25,000 (per month)
Summary of OPS, NPS, and UPS
Here’s the detailed comparison based on our previous discussions:
| Aspect | OPS | NPS | UPS |
|---|---|---|---|
| Employee Contribution | ₹0 (no contribution) | 10% of basic salary (₹60,000/year) | 10% of basic salary (₹60,000/year) |
| Employer Contribution | Government-funded (N/A) | 14% of basic salary (₹84,000/year) | 18.5% of basic salary (₹1,11,000/year) |
| Total Contribution | N/A (fully government-funded) | 24% of basic salary (₹1,44,000/year) | 28.5% of basic salary (₹1,71,000/year) |
| Gratuity | ₹8,65,385 (based on 30 years) | ₹8,65,385 (based on 30 years) | ₹8,65,385 (based on 30 years) |
| GPF | ₹73,40,752 (accumulated at 8% for 30 years) | Not applicable | Not applicable |
| Corpus at Retirement | N/A (no corpus) | ₹1,76,17,805 (based on 8% returns) | ₹2,09,21,143 (based on 8% returns) |
| Corpus Withdrawal | N/A | ₹1,05,70,683 (60% of corpus) | Not allowed |
| Lump Sum Payment | N/A | N/A | ₹3,00,000 (fixed lump sum for 30 years of service) |
| Pension (per month) | ₹25,000 (50% of basic salary) | ₹35,236 (from 40% corpus annuity) | ₹25,000 (50% of basic salary) |
Explanation:
Old Pension Scheme (OPS):
- No employee or employer contributions.
- Provides a fixed monthly pension of ₹25,000 based on 50% of the last drawn salary.
- Accumulates GPF (₹73,40,752) and a lump sum gratuity of ₹8,65,385.
- No corpus or withdrawal, as it is a defined benefit scheme funded entirely by the government.
National Pension System (NPS):
- Both the employee and employer contribute, with a total of 24% of the basic salary going towards the corpus.
- Corpus at retirement is ₹1,76,17,805, with 60% available for withdrawal and 40% used for purchasing an annuity.
- Monthly pension after corpus withdrawal is ₹35,236.
- No GPF, but the same gratuity as OPS.
Unified Pension Scheme (UPS):
- Higher employer contribution (18.5%).
- Corpus at retirement is also ₹2,09,21,143 (based on 8% returns).
- No corpus withdrawal allowed, but a fixed lump sum payment of ₹3,00,000.
- Pension is ₹25,000 per month, based on 50% of the last drawn salary, similar to OPS.
- Same gratuity amount as OPS.
Conclusion:
- OPS offers a secure pension and GPF, but no corpus flexibility.
- NPS provides higher flexibility with corpus withdrawal and a potentially higher pension, but it’s market-linked.
- UPS balances the benefits of OPS and NPS, offering a secure pension and higher contributions, though without corpus withdrawal flexibility.
If an employee does not withdraw the corpus from NPS and uses the entire corpus to purchase an annuity, the pension amount will be higher compared to withdrawing 60% of the corpus. Let’s calculate the monthly pension for all three schemes based on this scenario.
Comparison of Monthly Pension (No Corpus Withdrawal in NPS):
| Scheme | Monthly Pension |
|---|---|
| OPS | ₹25,000 |
| NPS | ₹88,089 (with full corpus used for annuity) |
| UPS | ₹25,000 |
Conclusion:
- NPS provides a significantly higher monthly pension of ₹88,089 if the entire corpus is used for annuity, thanks to the investment-based accumulation over time.
- OPS and UPS offer fixed pensions of ₹25,000 per month based on 50% of the last drawn salary, without the benefit of accumulating a large corpus.