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Calculator: UPS vs. NPS - which is better?

Posted on 26 Aug 2024
Author: Sayan Sircar

Tags: Calculator ; NPS ; Pension

8 mins read
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This article shows how to determine if an NPS subscriber should switch to the newly announced Unified Pension Scheme.

Calculator: UPS vs. NPS - which is better?

📚 Topics covered:

What are the features of the Unified Pension Scheme?
How do we know if UPS is better than NPS?
How to calculate if an NPS subscriber should switch to the UPS?

What are the features of the Unified Pension Scheme?

The Unified Pension Scheme (UPS) was announced on 25th August 2024 to “improve the National Pension System (NPS) for Central Government employees.” UPS offers:

A pension of at least 50% of the last 12 months’ salary (basic and dearness allowance) at the time of retirement. The minimum pension amount is ₹10,000/month.
The spouse will receive 60% of the pension upon the death of the original employee.
A lump sum based on the DA will be provided at the time of retirement.
The employee will contribute 10% of basic + DA (same as NPS), while the government will contribute 18.5% (up from the current 14% in the case of NPS).
A minimum of 25 years of total service is required (otherwise, a pro-rata pension starts from 10 years).
UPS is for Central Government employees only.
Opting into UPS, by stopping NPS, is a choice for the employee from 1st April 2025 onwards. An employee can choose to remain in NPS if they prefer.

The last point, since UPS is opt-in while NPS is mandatory, requires some calculation to determine if UPS is better than NPS.

How do we know if UPS is better than NPS?

We will follow these rules:

The retirement corpus must support inflation indexing throughout the entirety of retirement: any amount not coming from a pension (UPS or NPS) has to come from the rest of the portfolio.
The entire portfolio must support the other non-retirement goals of the investor, like house purchase, children’s college education, etc.
While having a guaranteed pension is good, it should not alter the risk-return characteristics of the current portfolio.
When the NPS subscriber switches to the UPS, their NPS corpus will be marked as zero.

The best option (NPS or UPS) is the one that, while following these rules, leads to a lower investment amount today. It is important to understand that UPS shifts most of the market risk in retirement from the retiree to the government since:

The minimum pension amount in UPS depends on the last-drawn salary.
The minimum pension amount in NPS depends on the market performance of the NPS corpus.

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How to calculate if an NPS subscriber should switch to the UPS?

The Arthgyaan goal-based investing calculator shows how to determine if it makes sense to switch to the UPS from NPS. We have a sheet “pension-in-retirement” that allows you to see which is better: no pension (i.e., NPS not started yet), NPS, or UPS.

We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

We will assume that the investor is a 38-year-old Central Government employee with ₹25 lakhs in NPS and another ₹25 lakhs invested in other assets. The employee has goals for the family and child:

Goal	Amount (₹ lakhs)	Years
Family Goals
Car	7	3
Foreign Vacation	5	5
Child Goals
School admission	2	1
School trip	2	9
UG: Admission + Year 1	9	14
UG: Year 2	7	15
UG: Year 3	7	16
UG: Industrial Training + Year 4	8	17
PG: Admission + Year 1	15	19
PG: Year 2	10	20
Down-payment of home	30	21
Marriage	15	27

Apart from these, the employee is targeting retirement starting 22 years from now with an annual expense of ₹5 lakhs (see “expenses-in-retirement” tab) in today’s money.

Retirement expense estimation

Other assumptions are as follows:

Item	Assumption
Inflation	7%
SIP Increment	10%
Years to retirement	22
Average Equity return post-tax	11%
Average Debt return post-tax	4%
Earning years left	22
Years in retirement	40

Base case: without pension

Case Without Pension For NPS vs. UPS

Case with NPS

Case With NPS For NPS vs. UPS

Case with UPS

Case With UPS For NPS vs. UPS

In the base case, we do not have NPS at all, and the entire portfolio is held outside NPS. Then we add ₹25 lakhs of NPS and later switch to UPS. To make an apples-to-apples comparison, we ensure that the NPS and UPS pensions (starting value, as the UPS one increases over time) are the same:

Case with NPS: Here, we have ₹25 lakhs in NPS and the rest outside NPS. Please see the “assets” sheet to modify the numbers.
Case after switching from NPS to UPS: Here, the corpus drops from ₹50 lakhs to ₹25 lakhs since the ₹25 lakhs in NPS is converted to UPS.

The summary of these cases is shown below:

Metric	Base	UPS	NPS
Target retirement corpus (lakhs)	766.13	766.13	766.13
Cost of goals today (lakhs)	317.00	282.71	327.55
Present corpus (lakhs)	50.00	25.00	50.00
Term Insurance cover (lakhs)	430.00	421.00	446.00
Monthly total SIP	95,224	96,029	99,334
Retirement-only SIP	56,304	45,874	60,414
Other goal SIP	38,920	50,155	38,920

Here

The base case is better than the NPS case since the NPS annuity is not inflation-indexed, and purchasing the annuity at the time of retirement marks down at least 40% of the NPS corpus as an annuity, with the rest then invested.
The capital allocated to the other goals will also change based on the choice of retirement product you choose
SIP amount for non-retirement goals change considerably depending on the option chosen

We cannot generalise the cases as it will depend on the current value of the NPS corpus and the other goals to be met by the portfolio.

“There ain’t no such thing as a free lunch” is an expression that speaks to the idea that everything ultimately has a cost and nothing is truly free. - Investopedia

As prudent observers of capital markets, it should be considered risky for the government to assume a considerable amount of market risk related to pension payments. Any NPS subscriber looking to switch to the UPS should understand that at the end of the day, any government scheme carries a significant amount of policy-change risk. Given that retirement is a multi-decade journey, and the government controls inflation and interest rates to a certain extent, a guaranteed pension scheme can easily turn sour for retirees depending on market performance.

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