Understanding the Basics: Unit-Linked Pension Plans and NPS
Before choosing, it is good to know the difference between ULPP & NPS. Let’s look at what each of them means.
What is a Unit Linked Pension Plan?
A Unit Linked Pension Plan (ULPP) is a type of market-linked retirement plan designed for you to accumulate funds systematically for your life post-retirement. The ULPP combines long-term investment and retirement planning. Your premium paid will be invested in funds like: equity fund, a debt fund, or a combination of the two, depending on your risk tolerance.
At the time of retirement (vesting), policyholders are typically given the option to withdraw a portion of the accumulated corpus as a lump sum, while the remaining amount is generally used to purchase an annuity or other retirement income option. The lump sum withdrawal may be tax-exempt up to certain limits, whereas the income received from annuity or pension options is usually taxable as per Income Tax Act, 1961.
What is NPS?
The National Pension System (NPS) is a Pension Fund Regulatory and Development Authority (PFRDA).-backed retirement scheme. You pay money regularly and it gets saved in your NPS account. When you retire, you can withdraw a portion of the money as a lump sum, and the rest is used to buy an annuity, which gives you monthly income.
NPS offers two types of accounts — Tier I and Tier II. The Tier I account is mandatory for retirement savings and gives tax benefits. The money is managed by fund managers and invested in different types of assets like equity, government bonds, and corporate debt. The Tier II account is a voluntary savings account that comes with a flexible withdrawal option. NPS subscribers can invest additional money and withdraw funds at any time, making it suitable for short- to medium-term goals.
Key Differences Between ULPP and NPS
Below is a simple table showing the Unit Linked Pension Plans vs NPS comparison:
| Parameters | ULPP | NPS |
|---|
Type
| Market-linked pension plan. ULPP also have life cover component
| Government-backed retirement scheme
|
Cost
| Costs include fund management fees, policy administration charges, premium allocation charges; etc
| An initial contribution fee of up to 0.50% (capped at ₹25,000) applies, and all future contributions are also chargeable
|
Discontinuation
| ULPP come with a lock-in period of 5 years, withdrawal before that may include surrender charges
| You can close your NPS account any time after 5 years of subscription; however, if you exit before 60 years of age, it is treated as a premature exitentails penalties
|
Withdrawals
| Partial withdrawals can be done after the lock-in period but are limited in amount and number
| If the total corpus in the Tier 1 account is less than ₹5 lakh, the subscriber can opt for a complete withdrawal. If the corpus is more than ₹5 lakh, 60% of the accumulated corpus is eligible for withdrawal and the rest is used to purchase annuity
|
Tax Benefits
| Tax deductions under Section 80C (old tax regime
| Contributions to NPS Tier 1 account are eligible for tax deductions; however, at maturity, while up to 60% of the corpus can be withdrawn tax-free, the remaining amount must be used to purchase an annuity, and the pension income from this annuity is taxable according to the income tax slab the income tax slab the income tax slab
|
Flexibility
| Flexibility to switch between market-linked funds
| Flexibility to actively choose among multiple range of fund and diverse asset classes according to individual retirement goals and risk tolerance
|
Conclusion
Choosing between ULPP vs NPS depends on your comfort with risk, your retirement goals, and other important factors. ULPPs can be suitable for people who are comfortable with market-linked funds. NPS is useful for those who prefer a low-cost retirement plan with steady savings.
Remember, both have lock-in periods and rules for withdrawal. Think carefully and review both options to stay secure in your golden years.
FAQs
Which is Better, NPS or Unit Linked Pension Scheme?
There is no one-size-fits-all answer. NPS is suitablefor those who want a government-backed and low-cost plan. ULPP suits people who want returns based on the market-linked funds like equity, debt or a mix of both. The choice depends on your risk appetite and future goals.
Can I Switch NPS to ULPP?
NPS and ULPP are two separate retirement schemes. You cannot directly switch between them.
Is the return guaranteed in Unit Linked Pension Plans or NPS?
Both ULPP and NPS returns are market-linked. Returns depend on the performance of the underlying funds you choose.
Can I invest in both ULPP and NPS for retirement?
Yes, you can invest in both diversifying your retirement savings and balance risk, returns, and tax benefits.
