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Difference between NPS & OPS. Why do employees want OPS?

The National Pension Scheme or New Pension Scheme (NPS) and the Old Pension Scheme (OPS) are both retirement savings plans that provide financial security to elderly citizens.

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Learn about the key distinctions between NPS (National Pension Scheme) and OPS (Old Pension Scheme) in this informative article.

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Introduction:

The National Pension Scheme or New Pension Scheme (NPS) and the Old Pension Scheme (OPS) are both retirement savings plans that provide financial security to elderly citizens and help them meet their daily expenses. However, they have some key differences in terms of eligibility, contributions, returns, tax benefits, flexibility, and return certainty. In this blog post, we will compare the features of both schemes and explain why some employees are opposing the NPS.

Old Pension Scheme (OPS):

The Old Pension Scheme (OPS) was introduced in the 1950s for government employees who have completed at least ten years of service. Under this scheme, employees receive a monthly pension based on 50% of their last drawn basic salary plus a dearness allowance upon retirement. The government pays the entire pension amount to the employees and also revises the dearness allowance twice a year. Thus, the pension increases with inflation and provides a fixed income to the retirees. The OPS does not require any employee contributions and the income is not subject to taxation.

Here are the main features of OPS:

Defined Benefit: Employees were guaranteed a fixed pension amount based on their length of service and the average salary during their last years of employment.

Government Contributions: The government contributed to the pension fund, ensuring financial security for retirees.

No Market Risk: Pension benefits were not dependent on market fluctuations, providing a sense of security.

Family Pension: OPS included provisions for family pensions in case of the employee’s demise.

New Pension Scheme (NPS):

The New Pension Scheme (NPS) was introduced in 2004 for central and state government employees and later extended to all citizens between 18-60 years (including NRIs) in 2009. It is a voluntary scheme administered by the Pension Fund Regulatory and Development Authority (PFRDA). Under this scheme, employees contribute 10% of their base pay plus dearness allowance, while their employers can contribute up to 14%. The contributions are invested in a diversified portfolio of government bills, bonds, corporate shares and debentures managed by professional fund managers regulated by the PFRDA. Upon retirement, employees can withdraw up to 60% of the NPS amount as a lump sum and invest the remaining 40% in annuities to receive a monthly pension. The NPS offers market-linked returns and allows subscribers to choose their asset allocation. The NPS also provides tax benefits, as 60% of the corpus on maturity is tax-free, while the remaining 40% is taxable when invested in annuities.

Here are the key features of NPS:

Defined Contribution: Under NPS, employees and employers contribute to a pension account, but there is no guaranteed pension amount. The pension depends on the contributions and market performance.

Choice of Investment: NPS offers a choice of investment options, including equity, government securities, and corporate bonds, allowing individuals to manage their investments.

Portability: NPS is portable across employers and locations, giving employees flexibility.

Annuity Purchase: Upon retirement, individuals must use a portion of their NPS corpus to buy an annuity, which provides a regular pension income.

Difference between the NPS and OPS:

The main difference between the NPS and OPS is the level of guaranteed pension provided. The NPS does not provide any guaranteed pension, whereas the OPS provides a guaranteed pension based on the individual’s last drawn salary and the number of years of service. The NPS also exposes subscribers to market risks, as the returns depend on the performance of the underlying assets. The OPS, on the other hand, provides return certainty, as it is based on the last wage received by the employee.

Why Employees Oppose the New Pension Scheme:

Some employees oppose the NPS because they prefer the security and stability of the OPS over the uncertainty and volatility of the NPS. They argue that the NPS does not protect them from inflation and does not offer adequate social security in old age. They also claim that the NPS is unfair, as it discriminates between different categories of employees based on their date of joining service. They demand that the government should restore the OPS for all government employees or at least give them the option to choose between the two schemes.

Uncertainty: One of the primary reasons employees oppose NPS is the lack of a guaranteed pension amount. Under OPS, employees were assured of a fixed pension, while NPS exposed them to market risk. Market fluctuations can significantly impact the final pension amount, causing anxiety among employees about their retirement security.

Inadequate Social Security: Critics argue that NPS does not provide adequate social security, especially for those who lack financial literacy. Managing investments and making financial decisions can be daunting for many, and there is a fear that individuals might not make wise investment choices, leading to lower retirement savings.

Inequality: NPS treats all employees equally, irrespective of their job or income level. This means that lower-income employees may struggle to accumulate sufficient funds for retirement, as they have to contribute the same percentage of their salary as higher-income individuals.

Inflexibility: Some employees find NPS inflexible compared to OPS. The mandatory annuity purchase at retirement limits their control over the pension corpus, and they may prefer more options for managing their retirement savings.

Transition Issues: For those who were already part of OPS when NPS was introduced, the transition process was often complex, and they might feel that they were unfairly moved to a new system without their consent.

Expert’s Opinion:

However, some experts suggest that the NPS is more sustainable and beneficial than the OPS in the long run. They point out that the OPS imposes a huge pension burden on the government, as there is no established fund specifically designated for pensions, which could grow continuously and reduce the government’s liability for pension payments. They also note that the OPS is not applicable to private sector employees, who constitute a large segment of the workforce. They opine that the NPS provides more flexibility and choice to subscribers, allowing them to generate higher returns and build a larger retirement corpus.

Conclusion:

Both the NPS and OPS have their advantages and disadvantages. The choice between them depends on various factors such as risk appetite, income level, tax implications, and future expectations. Ultimately, both schemes aim to provide a dignified and comfortable life to senior citizens after retirement.

The shift from the Old Pension Scheme to the New Pension Scheme in India has been a contentious issue, with employees voicing their concerns about uncertainty, inadequate social security, inequality, inflexibility, and transition issues. While NPS offers some advantages, it also places a greater responsibility on individuals to manage their retirement savings and navigate market risks. Employee opposition to NPS highlights the need for continuous evaluation and improvements in India’s pension system to ensure the financial well-being of its workforce during their retirement years.

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