A Comparative Analysis: The National Pension Scheme vs. The Old Pension Scheme

Two pension schemes, the National Pension Scheme (NPS) and the Old Pension Scheme (OPS), each offer distinct advantages and drawbacks, making them suitable for different groups of employees. Let's explore these differences to help make an informed decision.

For Employees: NPS vs. OPS

Overall, the National Pension Scheme (NPS) is beneficial for various groups of employees, but its suitability can vary widely depending on the years of service and personal financial planning needs.

For Employees with at Least 30 Years of Service

NPS is favorable for employees who have served for at least 30 years, as it offers significant benefits. Because NPS funds accumulate over the long term, employees can expect a lump sum that often surpasses the pension amounts received under the Old Pension Scheme (OPS). This makes NPS particularly advantageous for long-term employees with substantial service.

One of the key differences is that NPS provides a fixed pension amount, whereas OPS pensions are adjusted twice a year based on inflation. Employees with at least 30 years of service can expect to accumulate a substantial corpus, typically exceeding the amounts received through OPS.

For Employees with 10-15 Years of Service

For employees with 10-15 years of service, NPS is significantly less favorable. The reasons for this include the lack of extensive financial planning benefits and the potential for lower returns on investment compared to traditional pension schemes. Additionally, the mandatory annuity investment of 40% of the corpus can lead to lower overall returns.

Note: An example of a financial calculation is provided below to illustrate the financial impact of NPS versus OPS.

Financial Prospective

Assuming an employee contributes 2000 per year for 30 years with an average annual return of 12%, the expected corpus at retirement would be approximately 1.77 crores (approximately $234,000). The total contribution would be 39.48 lacs (approximately $50,000), with an additional 1.37 crores (approximately $179,000) in earnings. Out of this 1.77 crores, 40% is compulsorily invested in annuities, leaving 1.07 crores in flexible investments such as mutual funds, bonds, or shares. At an expected return of 8%, the annual interest earned would be around 856,000 INR (approximately $11,000), providing a monthly income of about 71,000 INR (approximately $917). Upon the death of the retiree, the remaining corpus will either go to the spouse or legal heirs, whereas OPS pensions typically continue to the spouse or children in case of death.

Additional Considerations

Personal financial planning is crucial in making an informed choice between NPS and OPS. It is recommended to use online financial calculators and gather as much information as possible before making a decision. Employees are advised not to rely solely on politicians or colleagues' unions but to adopt a proactive approach to their financial future.

Overall, NPS can be an excellent option for long-term employees aiming to build a substantial corpus. However, it may not be as favorable for those with shorter service commitments, as the benefits might not outweigh the costs and complexities involved.