Summary of this article
Younger employees with long careers ahead and a willingness to take market risk may find the NPS attractive, since strong market performance can potentially deliver a higher retirement corpus than UPS.
The government has now allowed eligible Central Government employees to move from the UPS (Unified Pension Scheme), which offers fixed and assured pension payouts based on years of service and salary, to the NPS (National Pension System), where retirement benefits depend on how investments perform in market-backed assets.
Allowing one-time switch from UPS to NPS, the Finance Ministry in an office memorandum, dated August 25, said, “It has been decided that a one-time, one-way switch from UPS to NPS shall be made available to all Central Government employees who have opted for UPS. This switch facility may be exercised by UPS optees any time not later than one year prior to the date of superannuation or three months prior to the deemed date of retirement in case of voluntary retirement, as applicable. Similar provisions will be made for resignation and cases of Rule 56J, with minor modifications as necessary. If switch facility not exercised as per aforesaid timelines, the employee shall continue under UPS by default."
Once this switch is exercised, employees will permanently lose their eligibility for the assured UPS pension and related benefits. Instead, their retirement income will be governed by the NPS rules, with a corpus that accumulates through contributions and market growth.
Importantly, this option is irreversible and must be exercised at least a year before retirement or within the specific timelines set for resignation or early retirement.
What Should You Do – Stay With UPS Or Switch to NPS?
“The choice between the two systems depends largely on an employee’s stage of career and risk appetite. Younger employees with long careers ahead and a willingness to take market risk may find the NPS attractive, since strong market performance can potentially deliver a higher retirement corpus than UPS,” says Santosh Joseph, CEO, Germinate Investor Services.
On the other hand, those approaching retirement are generally better off staying with UPS, which offers more predictable and secure outcomes through its assured, inflation-linked pension formula. This is especially true if NPS returns average below 10 per cent annually, in which case the fixed pension benefits of UPS tend to be superior.
“UPS provides a defined benefit, typically half of the average basic pay during the last year of service, along with protection for family pensioners and dearness allowance adjustments. This structure shields employees from market volatility and ensures an inflation-protected income stream for life,” says Joseph.
NPS, by contrast, ties retirement outcomes to investment performance. While this creates the possibility of building a significantly larger corpus, it also exposes employees to fluctuations in equity and debt markets, which makes outcomes less predictable.
Switching to NPS, therefore, means giving up the certainty of fixed pension and DA updates in return for the possibility of higher gains and greater flexibility, including options for lump-sum withdrawals.
“In the end, the decision comes down to personal priorities. Those who are comfortable with market risk, have a long investment horizon, and want the chance to build a larger corpus may find it worthwhile to shift to NPS. Those who are nearing retirement, or who value stability and guaranteed inflation protection, are likely better served by continuing with UPS,” suggests Joseph.
