What is the comparison between the Old Pension Scheme (OPS) and the National Pension Scheme (NPS): Which is the better investment option?

When planning for retirement, two prominent pension schemes often spark discussions: the Old Pension Scheme (OPS) and the National Pension Scheme (NPS). Each scheme comes with its own structure, benefits, and long-term financial implications, making the choice between them crucial for securing your future. While OPS offers a defined benefit structure with guaranteed returns, NPS is a market-linked, contribution-based scheme with flexibility and the potential for higher returns.

In this blog, we’ll dive into the key differences between the Old Pension Scheme (OPS) and the National Pension Scheme (NPS). We’ll provide you with the pros and cons of each to give you a clear understanding of their benefits and limitations.

What is an Old Pension Scheme (OPS)

The Old Pension Scheme (OPS) is a government-approved retirement plan that guarantees a monthly pension to government employees. To qualify, employees must have at least ten years of service, and the pension is calculated based on their last drawn basic salary and total years of service.

Under OPS, the government covers the entire pension amount after the employee retires, meaning no deductions are made from their salary during their working years. Retirees also benefit from bi-annual adjustments in Dearness Allowance (DA), leading to an increase in their pension whenever the DA is revised. However, OPS is exclusively available to government employees.

Features of the Old Pension Scheme

1. Fixed Monthly Pension: The pension amount is set in advance and remains constant, unaffected by market changes or fluctuations.

2. Government-Guaranteed: The government is responsible for providing and maintaining the pension payments, which ensures a stable and reliable income for retirees.

3. Linked to Inflation: Pensions under the Old Pension Scheme are adjusted regularly to keep pace with inflation, helping retirees maintain their purchasing power despite rising costs.

4. No Direct Contribution by Employees: Employees under the OPS do not need to make direct contributions to the pension fund during their working years; the government funds the entire pension amount.

Old Pension Scheme Advantages and Disadvantages

Advantages of OPS Scheme	Disadvantages of OPS Scheme
Provides a guaranteed lifelong income after retirement.	It places a significant financial burden on the central and state governments.
Pension is calculated based on a set formula: 50% of the last drawn basic salary plus DA or the average earnings over the last ten months, whichever is higher.	No pension corpus is built, which could grow over time and lessen the government’s pension liabilities.
Pension amounts increase with bi-annual revisions of Dearness Allowance (DA).	Unsustainable due to continuously rising pension liabilities.
No salary deductions are made for pension contributions during employment.	Extended pension payouts due to increased life expectancy, resulting in higher costs for the government.
The government covers all pension-related expenses.
Guarantees pension payments that are adjusted for inflation and pay commission changes, benefiting retirees and their spouses.

What is the National Pension Scheme?

The National Pension Scheme (NPS) was introduced in 2004 as a market-linked, defined contribution pension plan originally designed for government employees. Over time, it was expanded to include all Indian citizens, providing a flexible tool for retirement savings. NPS offers diverse investment options, allowing contributions to be allocated across equities, government bonds, and other asset classes, catering to varying risk preferences and financial goals.

Features of the National Pension Scheme

1. Defined Contribution Plan: In this scheme, both employees and employers make regular contributions to the pension fund. The final pension amount depends on the total contributions and investment performance over time.

2. Market-Linked Returns: The returns on the NPS are influenced by the performance of the underlying investments in the financial markets, which can vary based on market conditions.

3. Partial Lump Sum Withdrawal: Upon retirement, you can withdraw up to 60% of the accumulated corpus as a lump sum. The remaining 40% must be used to buy an annuity, which provides a steady stream of income.

4. Tax Benefits: Contributions made to the NPS qualify for tax deductions under Sections 80C and 80CCD of the Income Tax Act, offering potential tax savings while investing for retirement.

Advantages and Disadvantages of National Pension Scheme

Advantages of National Pension Scheme	Disadvantages of National Pension Scheme
Employees can withdraw 60% of the total corpus at retirement, which is tax-free.	Employees must contribute 10% of their basic salary plus DA towards their pension each month.
Offers flexibility and control, allowing employees to choose fund managers based on their performance.	The pension amount is variable, as it depends on the returns generated from market-linked investments.
Provides potentially higher returns, whether invested in equity or debt, as funds are managed by professionals.	Lack of familiarity with financial terms like equities and securities may lead employees to choose less optimal fund managers.
NPS contributions are eligible for annual tax deductions.
Regulated by PFRDA, ensuring safe investments through transparent norms, performance reviews, and fund monitoring.
NPS accounts can be easily managed and operated online.
Partial withdrawals before retirement are allowed after 10 years, with up to three withdrawals permitted before age 60.

Old Pension Scheme VS. National Pension Scheme

Below are the differences between the Old Pension Scheme (OPS) and the National Pension Scheme (NPS).

Particulars	Old Pension Scheme (OPS)	National Pension Scheme (NPS)
Eligible Employees	Restricted to government employees	Open to government employees, private citizens aged 18-60, and NRIs
Pension Payment Basis	Pensions are provided based on the last drawn salary plus Dearness Allowance (DA)	Pensions are based on the contributions made to the NPS scheme during the employee’s working years
Pension Amount	50% of the last drawn salary plus DA, or the average salary from the last 10 months, whichever is higher	60% of the corpus can be withdrawn as a lump sum at retirement; 40% is invested in annuities for a pension
Contribution Amount	Employees are not required to make any contributions	Government employees contribute 10% of their salary (basic + DA), with the government contributing 14%
Income Tax Benefits	No tax benefits are available	Tax deductions up to ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1b)
Tax on Pension Amount	The pension received is fully tax-exempt	60% of the NPS corpus is tax-free; the remaining 40% is subject to taxation

Conclusion

Both OPS and NPS offer distinct benefits. OPS guarantees a steady, government-supported retirement income, making it a more secure choice for those who prefer minimal risk. Conversely, NPS provides more flexibility, tax benefits, and the possibility of higher returns for individuals comfortable with market fluctuations. Your decision should be based on factors like employment type, financial goals, and risk tolerance. Selecting the appropriate pension plan is essential for securing a stable retirement. Carefully evaluate your options and choose the scheme that best fits your long-term financial needs.

Source : Forumias.com