New Pension Scheme vs. Old Pension Scheme: Comparing Retirement Benefits | NPS vs. OPS

In 2004, a groundbreaking initiative in the form of a New Pension Scheme, now known as the National Pension System (NPS), was introduced for Central Government employees through the Ministry of Finance (Department of Economic Affairs) Notification No. 5/7/2003-ECB & PR dated 22nd December 2003.

NPS became mandatory for all new recruits to the Central Government service (except the armed forces) starting from 1st January 2004. This marked a significant shift in the landscape of pension schemes, emphasizing a contribution-based approach.

The National Pension System is open to both government employees and citizens aged between 18 years to 60 years. In contrast, the old pension scheme, designed exclusively for government employees, has seen a resurgence in several states, where it has been restored for government employees.

In 2021, the aging population saw a significant surge, with roughly 34 million more elderly individuals compared to the Population Census of 2011. Projections estimate an additional 56 million elderly people by 2031.

This demographic shift places a spotlight on retirement planning, making the debate between the New Pension Scheme (NPS) and the Old Pension Scheme (OPS) more relevant than ever. Especially pertinent for government employees, this article aims to dissect the nuances of both pension schemes, namely the Old Pension Scheme (OPS) and the National Pension System (NPS), shedding light on their respective benefits and drawbacks.

With the growing elderly population and the evolving landscape of pension plans, understanding these schemes becomes crucial in making informed decisions about one’s retirement future.

Old Pension Scheme (OPS)

The Old Pension Scheme is tailored to provide a stable, lifelong income for retired government employees. Retirees under OPS receive 50% of their last drawn salary plus dearness allowance as a monthly pension.

Notably, this payout doesn’t require deductions from the employee’s salary during their service years. Some key benefits and drawbacks include:

Benefits of the Old Pension Scheme:

1. Ensures a stable, lifelong income in the form of a monthly pension.
2. No deductions from salary, reducing the financial burden on employees.
3. Pension income under OPS is tax-free.
4. Voluntary contributions can be made to create a retirement corpus.
5. Medical benefits for the pensioner and their family.
6. Post-retirement benefits, such as gratuity and commutation.
7. Family pension for dependents in case of the pensioner’s demise.
8. Revision in dearness allowance (DA) twice every year for pensioners.

Disadvantages of the Old Pension Scheme:

1. Limited to retired government employees.
2. The OPS is open only for employees who retire from government jobs.
3. Central and State governments face a massive burden under this scheme.
4. There is no provision to lower the liability of the government.

National Pension System (NPS)

Introduced in 2004, the National Pension System is open to both government and private sector employees, catering to citizens aged 18 to 60. Administered by the Pension Fund Regulatory and Development Authority (PFRDA), it comprises Tier I and Tier II accounts, with Tier I funds locked until retirement. Let’s explore the benefits and drawbacks:

Benefits of National Pension System (NPS):

1. Tax benefits to employees on self-contribution.
2. Tax benefits to employees on the employer’s contribution.
3. Tax benefits to self-employed individuals.
4. Tax benefits on partial withdrawal from NPS account.
5. Tax benefit on the purchase of annuity.
6. Tax benefit on lump sum withdrawal.
7. Tax benefits to corporates/employers contributing to NPS.

Disadvantages of the National Pension System:

1. Requires a deduction from salary.
2. Income received after retirement is taxable.
3. NPS Tier I funds can’t be withdrawn before the age of 60.
4. Withdrawal limits on Tier I accounts.
5. Taxation at the time of withdrawal.
6. Account opening restrictions, limiting accessibility.
7. Limited exposure to equities, potentially affecting returns.
8. Mandatory annuity purchase, reducing flexibility.
9. Complexity in choosing the best NPS fund manager.

Comparing NPS and OPS

While both NPS and OPS have their advantages, OPS stands out for not requiring deductions from salary. However, it is exclusive to government employees. NPS, on the other hand, extends benefits to all citizens, making it a preferred choice for those outside government service. The demand for OPS restoration is growing, with some states already making the switch.

In conclusion, choosing between NPS and OPS depends on your employment status and preferences. If you’re a government employee, OPS might seem appealing, but NPS offers broader inclusivity and extensive tax benefits, making it a viable choice for private sector employees and the self-employed.

As the debate continues, it’s crucial to consider individual needs and government policies in making the right retirement investment decision. The increasing elderly population underscores the urgency of robust pension schemes for the growing aging population.