NPS vs OPS: Why NPS is the clear winner for retirement planning

The Finance Ministry has set up a group to review the pension system for government workers. The committee will be led by Finance Secretary T V Somanathan and will suggest ways to improve pension benefits for government employees. The committee will also consider the financial impact of any changes on the budget. Other members of the committee include officials from the Department of Personnel and Training, the Department of Expenditure, and the Pension Fund Regulatory and Development Authority. The committee was created because some states are going back to an old pension system that isn't financially sustainable. The committee won't consider bringing back the old system for central government workers. The National Pension System is now used for all government workers, except for those who joined the armed forces or central government on or after January 1, 2004. There's no set timeline for the committee's report.

Some states like Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have restored the Old Pension Scheme (OPS) instead of the New Pension Scheme or National Pension Scheme (NPS) for government employees. Both these schemes provide a monthly pension for the Central and State government employees after retirement. 

Understanding the Old Pension Scheme (OPS)

The Old Pension Scheme (OPS) is a retirement plan for government employees that guarantees a monthly pension based on their last drawn basic salary and years of service, provided they have worked for at least ten years. Under OPS, the government pays the entire pension amount to retired employees, without any deduction from their salaries during their service period. Retired employees also receive the benefit of Dearness Allowance (DA) revision twice a year, which increases their pensions. However, OPS is applicable only to government employees.

Understanding the National Pension Scheme (NPS)

In 2004, the government discontinued the Old Pension Scheme (OPS) and introduced the National Pension Scheme (NPS) for government employees. Later in 2009, the government expanded the scope of the NPS to include all citizens, including self-employed and unorganised workers. It is a voluntary pension scheme where citizens can contribute an amount every month until the age of 60 and receive a pension after retirement. The NPS is administered by the Pension Fund Regulatory and Development Authority (PFRDA). Government employees contribute 10% of their basic salary plus Dearness Allowance (DA), and the government contributes 14% of the basic salary plus DA every month. Other citizens can contribute a minimum of Rs.500 monthly towards NPS. The contributions are consolidated into a pension fund, which invests in a diversified portfolio of government bills, bonds, corporate shares, and debentures. Professional fund managers, such as SBI, LIC, and UTI, manage the NPS investments. Upon retirement, an individual can withdraw up to 60% of the NPS amount and invest the remaining 40% with any of the ten professional fund managers to receive pension annuities as a monthly pension.

Which employees are eligible to choose the Old Pension Scheme (OPS) as an option?

In 2004, the government introduced the NPS, which replaced the OPS for all employees who joined service after that year. However, in February 2023, the Department of Pension and Pensioner’s Welfare (DoPPW) provided Central Government employees with a one-time option to choose to get a pension under the OPS. Eligible employees include those appointed for a vacant post advertised or notified before the NPS notification date and those who joined service on or after 01.01.2004, and are currently covered under the NPS. The deadline for filing for the OPS option is 31.08.2023, and those who do not opt for it will continue to be covered under the NPS.

What are the advantages of the National Pension Scheme (NPS) over the Old Pension Scheme (OPS)?

There are several ways in which the National Pension Scheme (NPS) is considered better than the Old Pension Scheme (OPS):

1. Flexibility: The NPS provides more flexibility to individuals in terms of investment options, fund managers, and the choice to switch between investment options. Individuals can choose from different asset classes such as equities, government bonds, and corporate bonds, depending on their risk appetite.
2. Portability: The NPS is a portable scheme, meaning that individuals can continue their account even if they change jobs or locations. This makes it more convenient for individuals who have a career that involves frequent transfers.
3. Market-linked: The NPS is a market-linked scheme, and the returns on investment are based on the performance of the investments made by pension fund managers. This makes it possible for individuals to earn higher returns on their investments.
4. Lower management charges: The NPS has lower management charges compared to the OPS. This means that a larger portion of the investment amount goes towards building the retirement corpus, and the individual gets to keep more of the returns.
5. Tax benefits: the investments up to Rs.1,50,000 per annum invested in NPS are tax-deductible under Section 80C of the Income Tax Act, 1961. An additional Rs.50,000 is also tax-deductible under Section 80CCD. Thus, you can plan your retirement corpus and enjoy tax benefits under the NPS.

Overall, the NPS is considered a more transparent, flexible, and market-linked scheme compared to the OPS, providing individuals with greater control over their retirement savings. However, it is important to note that the investment returns are subject to market fluctuations and the individual bears the investment risk.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.