Is NPS or UPS Better?

Ans: The recent announcement regarding the Unified Pension System (UPS) aims to simplify and unify various pension schemes, including the National Pension System (NPS). However, it's important to consider that NPS is a well-established, market-linked retirement savings scheme offering tax benefits, flexibility in investment choices, and partial withdrawal options.

Since UPS is new and its details are still emerging, it's advisable to continue with NPS for its proven track record and flexibility. Once more information about UPS is available, you can reassess your options.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Dear Vivek,
Thank you for your query regarding the recent pension scheme announcement. Let’s understand the key differences between the National Pension System (NPS) and the newly introduced Universal Pension Scheme (UPS) and find out which might be more beneficial for you.
National Pension System (NPS) NPS is a government-backed retirement savings scheme where you contribute regularly during your working years, and the funds are invested in a mix of equity, corporate debt, and government bonds. Upon retirement, you receive a portion of the accumulated corpus as a lump sum, and the rest is used to purchase an annuity that provides a regular pension. Let’s see what are Tax Benefits Contributions to NPS are tax-deductible up to Rs 1.5 lakh under Section 80C and an additional Rs 50,000 under Section 80CCD(1B), making it attractive for tax-saving purposes. The returns on NPS depend on market performance, as it invests in equity and debt instruments. Historically, the average return has been between 8-10%, making it a relatively high-return pension option. If you see 2023 the returns are between 16 to 20%. There is Flexibility to choose your own asset allocation (equity vs. debt) or opt for auto-allocation based on your age and risk profile. For Withdrawals At the age of 60, you can withdraw 60% of the corpus tax-free, while 40% is used to purchase an annuity, which provides a regular pension. For premature exit is only possible after 5 Years after registration. you can withdraw entire amount if corpus is below 2.5 Lakh. If corpus is beyond 2.5 lakh then you can only withdraw 20% and balance 80 % to be invested to buy annuity.
In case of Universal Pension Scheme (UPS) it is a recently introduced pension scheme aimed at providing retirement benefits to all citizens, including those in informal sectors who may not have access to other retirement schemes. It is designed to ensure that every citizen has a basic income after retirement. For Contribution: UPS is likely to have lower contribution requirements compared to NPS, making it more accessible to those with lower incomes or irregular earnings. The scheme promises universal coverage, meaning it is open to all citizens, regardless of their employment status. UPS may offer fixed or modest returns, more similar to a traditional pension plan, and less focused on market-linked investments like NPS. The scheme is likely to be simpler to manage, with fewer choices regarding asset allocation and investment decisions. Under the UPS, the assured pension will be the average basic salary + DA drawn in the previous 12 months before superannuation. This would mean that government employees, at retirement, will get 50% of the average of the last 12 months' salary + DA.
Which One Is More Beneficial?
If You’re Seeking Higher Returns and Flexibility then NPS would be a better option as it allows for market-linked returns (higher than most traditional pension schemes) and gives you control over your investment choices. It’s ideal for those who want to accumulate a larger retirement corpus.
If You Want Simplicity and Universal Access then UPS could be a good choice for individuals looking for an easy-to-understand, universally available pension scheme with a stable income. It is designed to cater to a broader section of the population, especially those in informal jobs or without regular retirement savings.
For Tax Benefits: NPS offers significant tax benefits under Section 80C and 80CCD, which may make it more attractive if you’re in a higher tax bracket.
For Lower-Income Individuals: UPS may be more beneficial due to its accessibility and potentially lower contribution requirements.
It’s important to assess your long-term goals, income, and risk tolerance before making a decision. If you need further clarification or help choosing the best scheme for you, feel free to reach out.
Best regards,
Nitin Narkhede
Founder & MD, Prosperity Lifestyle Hub https://Nitinnarkhede.com
Free Webinar https://bit.ly/PLH-Webinar

Ans: Investing for your children’s future is a commendable goal. With the government introducing the Universal Pension Scheme (UPS) alongside the National Pension System (NPS), it’s natural to weigh your options. The goal here is to find an investment that will not only secure their future but also maximize returns.

In this context, considering mutual funds as a primary investment vehicle may be the most effective strategy. Mutual funds can offer greater flexibility, potential returns, and the ability to meet specific financial goals for your children, aged 23 and 18.

Understanding the NPS and UPS
National Pension System (NPS)
NPS is a well-known government-backed pension scheme. It offers a mix of equity, debt, and government securities. The returns from NPS are market-linked, meaning they depend on the performance of the underlying assets. NPS also comes with tax benefits under Section 80C and 80CCD(1B) of the Income Tax Act.

Pros of NPS:

Tax Benefits: Investment in NPS offers tax deductions.

Long-Term Growth: NPS allows for disciplined retirement savings.

Partial Withdrawal: NPS permits partial withdrawals for specific needs.

Government-Backed: Being a government-backed scheme, it’s secure.

Cons of NPS:

Lock-In Period: The investment is locked until retirement, with limited withdrawal options.

Lower Equity Exposure: The maximum equity exposure in NPS is capped at 75%.

Annuity Requirement: A significant portion of the maturity amount must be used to purchase an annuity, which offers lower returns.

Universal Pension Scheme (UPS)
The recently introduced UPS is designed to provide universal coverage, catering to a broader demographic. Like NPS, it’s market-linked but with potentially more conservative investment options.

Pros of UPS:

Broader Coverage: Aimed at providing pension coverage to all.

Government Support: Backed by government initiatives.

Cons of UPS:

Lower Returns: Likely to be more conservative, with lower equity exposure.

Limited Flexibility: Similar to NPS, with a long lock-in period.

Why Mutual Funds Stand Out
Flexibility in Investment
Mutual funds offer a range of options, from equity funds to debt funds, catering to various risk appetites. For your children, considering their age and future financial needs, mutual funds provide the flexibility to adjust the investment strategy as they grow older.

Advantages:

Customizable Portfolios: You can choose funds that align with your children’s risk profile.

Liquidity: Mutual funds are more liquid, allowing easy access to funds when needed.

Diversification: Mutual funds offer diversification across different asset classes.

Higher Potential Returns
Compared to NPS and UPS, mutual funds, especially equity funds, have the potential to deliver higher returns. Over a long-term horizon, equity mutual funds can outperform other investment options due to their exposure to the stock market.

Equity Mutual Funds:

Growth-Oriented: Ideal for long-term goals like funding education or purchasing a home.

Variety: Includes large-cap, mid-cap, and small-cap funds, each with its growth potential.

Debt Mutual Funds:

Stability: Provides stability with lower risk, suitable for conservative investors.

Interest Rate Dynamics: Debt funds can take advantage of changing interest rates for returns.

Why Not NPS or UPS?
Lock-In Period Constraints
Both NPS and UPS come with significant lock-in periods, restricting access to funds until retirement age. This could be a drawback if your children require funds for education, starting a business, or other life events before they reach retirement age.

Impact on Liquidity:

NPS: Limited partial withdrawal options only for specific reasons.

UPS: Likely to follow similar restrictions as NPS.

Annuity Requirement
A significant downside of NPS, and likely UPS, is the annuity purchase requirement. Upon maturity, a large portion of the corpus must be used to buy an annuity, which generally offers lower returns. This reduces the flexibility to use the accumulated wealth as per the individual’s needs.

Annuity Constraints:

Lower Returns: Annuities typically provide lower returns compared to mutual funds.

Limited Usage: The annuity locks in the amount, providing a fixed income, which may not be sufficient to meet inflation-adjusted needs.

Disadvantages of Index Funds
While index funds are popular for their low costs, they may not be the best option for achieving higher returns. Index funds merely replicate the market index, offering no potential to outperform the market.

Key Points:

No Outperformance: Index funds only match market returns.

Lack of Active Management: Index funds lack the advantage of professional fund management, which can potentially add value through stock selection.

Benefits of Regular Funds Through a Certified Financial Planner (CFP)
Investing through regular funds via a Certified Financial Planner (CFP) offers several advantages. A CFP can help you navigate the complex investment landscape and select funds that align with your goals.

Advantages:

Professional Guidance: A CFP provides expert advice tailored to your needs.

Regular Monitoring: Regular funds managed by a CFP are closely monitored and adjusted based on market conditions.

Long-Term Strategy: A CFP can help devise a long-term strategy that adapts to life changes, ensuring your investment remains aligned with your children’s needs.

Mutual Funds for Children’s Education
Equity Mutual Funds for Long-Term Goals
For your 23-year-old child, currently in the 4th year of MBBS, equity mutual funds can be an excellent choice. With a longer investment horizon, equity funds can help build a substantial corpus by the time they start their career or pursue higher studies.

Considerations:

Aggressive Growth: Focus on funds with a strong track record in equity markets.

Diversified Portfolio: Invest in a mix of large-cap, mid-cap, and small-cap funds.

Balanced Mutual Funds for a Moderate Approach
For your 18-year-old child, balanced mutual funds can be a safer yet growth-oriented option. These funds invest in a mix of equity and debt, providing stability with the potential for growth.

Advantages:

Reduced Risk: Balanced funds lower the risk by including debt securities.

Steady Growth: Provides a steady growth potential suitable for education funding.

Evaluating Risk Tolerance
Understanding your children’s risk tolerance is crucial in deciding the right investment strategy.

For the 23-Year-Old:

Higher Risk Appetite: At this age, they can afford to take more risks with a greater focus on equity.

Long-Term Horizon: The longer investment horizon allows for recovery from market downturns.

For the 18-Year-Old:

Moderate Risk Appetite: A balanced approach with both equity and debt is advisable.

Shorter Horizon: As they approach higher education, a mix of stability and growth is ideal.

Final Insights
Investing in mutual funds offers flexibility, potential for higher returns, and customization based on your children’s needs. While NPS and UPS have their benefits, they come with significant limitations such as lock-in periods, lower equity exposure, and annuity requirements.

For your children, mutual funds provide the best opportunity to maximize returns, meet future financial needs, and adapt to changing circumstances.

By working with a Certified Financial Planner, you can ensure that your investments are managed professionally, with regular monitoring and adjustments, helping you stay on track towards your children’s financial goals.

Finally, prioritize a diversified approach, balancing risk and reward, to secure a bright financial future for your children.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Hello;

The main plus point of UPS is guaranteed benefit i.e. 50% of last drawn salary as pension.

And this pension has Dearness allowance component so your retirement income is pegged to inflation.

However you will need to carefully assess the pro's and con's of each system and take a call. My advice will be for UPS.

Best wishes;

Ans: You’ve shown real commitment by becoming disciplined in recent years.
Let’s now create a 360-degree plan to secure your financial future.

Your Current Financial Profile
Age: 46 years

Employment: Central Government

Monthly in-hand salary: Rs. 88,000

NPS corpus: Rs. 30 lakhs

LIC investment: Rs. 8 lakhs (matures in 2027)

Gold bought from 2020 till now: Rs. 25 lakhs

Owns ancestral home; no housing rent or EMI burden

Married late; has 3-year-old son

No other investments currently

You have built a strong NPS corpus.
You also have gold and an LIC policy.
But your asset allocation is unbalanced.
It needs more diversification for stability and growth.

Understanding NPS and the New UPS Option
Government employees now have the choice to move from NPS to UPS.
This switch is optional and available for a limited time.

Let’s compare them carefully before any decision.

NPS – National Pension System
Pension is based on market performance

No assured income in retirement

Allows investment choice in equity and debt

Gives tax benefits under multiple sections

Offers flexibility but comes with market risk

NPS is good for growth but lacks guaranteed pension.
Returns depend on fund performance.
Pension amount at retirement is not fixed.
You will need to buy annuity at the end.
But annuity returns are generally low.
Also, annuity income is taxable.

UPS – Unified Pension Scheme (New Option)
Offers guaranteed pension after retirement

Pension amount is fixed at 50% of average last salary

Needs at least 25 years of service

Government will contribute more than under NPS

Gives peace of mind with predictable income

UPS gives financial stability in retirement.
It is not linked to market returns.
But you lose the flexibility and market growth of NPS.
You also don’t have control over your retirement corpus.
It may fall short of inflation-adjusted needs.

Which is Better for You?
You are 46 now.
So, you may have already completed more than 20 years of service.
If your qualifying service is 25 years, you can choose UPS.

Choose UPS if:

You want assured income in retirement

You are uncomfortable with market risks

You don’t want to manage investments post-retirement

Stay with NPS if:

You want growth potential with flexibility

You are okay with variable pension income

You are willing to plan annuity and withdrawals

Since you are already in NPS with Rs. 30 lakh corpus,
you should weigh the impact of switching carefully.
You can’t reverse it once opted.
Compare estimated pension under UPS
with possible pension from NPS corpus.

About the LIC Policy
You mentioned LIC worth Rs. 8 lakhs maturing in 2027.
You didn’t specify if it is term or endowment.

If it is an endowment plan, returns will be very low.

Consider surrendering the policy post-maturity.
Reinvest the maturity amount into mutual funds
through a Certified Financial Planner and MFD.

Avoid mixing insurance and investment.

Over-Exposure to Gold: A Concern
You’ve accumulated Rs. 25 lakhs worth of gold.

That’s a very high allocation to a single asset.

Gold does not give regular income.
It doesn’t beat inflation in the long term.
Also, jewellery has making charges and low resale value.
Liquidity is also limited compared to financial assets.

You may retain some portion as family reserve.
But avoid fresh investment in gold.
Avoid considering gold as your core long-term asset.

Create an Emergency Fund
You have a dependent child and only one income.
Maintain an emergency fund of 6 months’ expenses.

Keep it in a liquid fund or savings account.
This will help during medical or job emergencies.

Plan for Child’s Education
Your son is only 3 years old.
You have 15 years before his higher education.

Start a SIP now for his future.
Use a diversified mutual fund with long-term potential.

As he grows, reduce equity exposure gradually.

Create a dedicated portfolio only for education.
Don’t mix it with other goals.

Start SIP in Mutual Funds for Growth
Mutual funds offer good diversification and professional management.
Avoid direct funds, especially if you lack expertise.

Regular funds with support of CFP and MFD
offer hand-holding, periodic review, and behavioural support.

Direct funds lack personal guidance.
You may end up choosing unsuitable schemes.

Investing through an MFD with CFP credential
brings strategy, discipline, and peace of mind.

Avoid index funds.
They just follow the market blindly.
They don’t protect during market fall.

Actively managed mutual funds are better.
They aim for alpha returns and are guided by research.

Retirement Planning Must Start Now
You have only around 14 years left before retirement.

Depending only on UPS/NPS will not be enough.

You need an additional retirement corpus
to handle inflation and rising medical costs.

Start a separate SIP only for retirement.

This will help supplement your pension.

If you retire at 60 and live till 85,
your retirement will last 25 years.

Plan well in advance to avoid dependence later.

Do a Monthly Budgeting Exercise
Your current in-hand salary is Rs. 88,000.
You can still start small SIPs with Rs. 5,000 to Rs. 10,000.

Track expenses.
Avoid unnecessary purchases.
Gold buying can be stopped.

Assign money towards education, retirement, and emergency fund.

Check for Existing Insurance
Check if you have life cover.
If not, take a pure term insurance plan.

This will secure your son’s future.
Also take family health insurance.

Medical bills can wipe out savings.

Do Not Depend on Physical Assets Only
Gold is not income-producing.
House is for living, not for income.

You need financial assets for retirement cash flows.

Create a financial asset base now
through mutual funds and NPS.

Final Insights
You have taken a step in the right direction.
Your gold assets and NPS corpus give a base.

But you need to balance and grow wisely.
Don’t depend only on government pension.
Start SIPs for retirement and child’s future.

Don’t lock money in low-return products.
Seek professional support for fund selection and goal tracking.

Make every rupee count from now on.
That’s how you can create financial freedom in retirement.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment