After the Supreme Court asked the Employees Provident Fund Organisation (EPFO) to offer a higher pension option to its older members, there’s been a flurry of articles and videos that give you a ‘yes or no’ answer to the question: Should I opt for pension on full pay? Here’s the background.
With the EPF setting a new deadline of May 3 to opt in, some urge you to take this ‘golden opportunity’, while others warn you off. But in reality, the decision needs to vary based on one’s personal financial situation.
Read more: EPFO’s higher pension scheme: What’s in it for you?
How to decide
To make any investing decision, you need to know the returns you’ll earn on the money you’re committing. The pension decision is no different. Many folks seem to be under the impression that simply filling in a consent form before May 3 will entitle them to a free lifelong pension from the government. But there’s a fairly large investment you need to make, to earn this pension.
EPFO rules and the SC ruling clearly state that, for guaranteed pension on his full basic pay, an employee needs to deposit 8.33 per cent of his past employer’s contributions on full pay, into the EPS kitty. This is with the accrued interest. Therefore, if you to opt for higher pension, you should expect the EPF to dock a significant chunk of money from your accumulated EPF balances, with immediate effect. This transfer is irreversible and the money will not come back either to you, or your nominees. If you have some years left to retirement, 8.33 per cent of your future employer’s contributions will also go into the EPS kitty.
Also read: EPF higher pension: How to apply
Therefore, you need two bits of data to decide whether to opt for the pension on full pay – your likely pension and the EPF balances you will need to give up. These two metrics, which will vary individually, will decide if the scheme is financially worth your while. It would have been handy if the EPFO had provided you with these two numbers, but so far, it hasn’t.
Calculating the pension
According to EPFO rules, pension payable to a retiree is based on a standard formula: Pension = Average pensionable salary in the 60 months preceding retirement * Pensionable service/70. After September 1, 2014, the ‘pensionable salary’ in this formula was capped at ₹15,000/month. So if you were earning more than this, the maximum pension that you could get was ₹6,428 per month (₹15,000*30/70). But the SC ruling allows employees who were EPFO members from before September 1, 2014, and earning more than ₹15,000 to sign up for pension based on their actual pay. This gives eligible employees a chance to significantly increase their pensionable salary in the above formula.
‘Pensionable salary’ is the pay on which your employer is making PF contributions (usually basic pay plus DA). From your EPFO passbook, you can straightaway arrive at your current pensionable salary from the ‘EPF wages’. But do note that your pension will be based on your average pensionable salary in the last five years leading up to retirement. Pensionable service (capped at 35 years) is the period for which you have been an EPF member, with your employer regularly contributing.
Based on the above, for an employee who earned basic pay of ₹1,00,000/month in the five years before retirement and worked for 30 years, the ballpark pension will be about ₹42,850 per month (₹100,000*30/70). But for someone earning ₹20,000/month with 10 year service (the minimum), the pension will be just ₹2,857. The longer your pensionable service and higher your basic pay, higher the pension. EPS also pays pension at 50 per cent to the spouse on the death of the pensioner.
Calculating the deposit you need to make from your past EPF balances is a far trickier task. If you have your EPFO passbook for your entire service history, you can attempt this arduous exercise. You can apply 8.33 per cent of EPF wages to your employer’s contributions over the years and deduct pension contributions already made, to arrive at a ballpark number on the likely deposit. Hopefully, your company’s HR department or EPFO can help you with the actual number before May 3.
Once you have this number, it becomes easier to gauge if EPS is a better deal for you than other deposit schemes available in the market for seniors. For instance, parking ₹25 lakh in the post office Seniors Citizens Savings Scheme (with a 5-year lock-in) will fetch you ₹16,667 per month at the current 8 per cent interest. Investing ₹25 lakh in LIC’s annuity scheme Jeevan Akshay 7 (50 per cent pension to spouse) will fetch you monthly pension of about ₹16,800. Do note that SCSS refunds your principal after five years while LIC allows surrender. No such flexibility is available in the EPS where you permanently lose the principal deposited.
Making a decision with such large financial implications for your retirement cannot be a pure numbers game. So, before surrendering your hard-earned EPF balance to the government, you need to assess others factors seriously.
- Would you have a sufficient sum left in your retirement kitty after the EPS deposit, to meet medical and caregiving expenses for you and dependant family members?
- Would you have enough to meet post-retirement financial goals like children’s education and repay loans?
- Are you confident of reasonable longevity? Should something happen to you soon after retirement, your family would lose the lumpsum and receive only half the pension.
- As the EPS pension is fixed and will mean reduced purchasing power with inflation, would you have a sufficient corpus left over to supplement your pension with inflation-beating avenues?
- Can you actively manage your money using vehicles like mutual funds, to earn better returns than EPS?
- How much confidence do you have in the government and EPF to not change the pension formula or terms of this scheme over the years, if it turns unviable for the fisc?
If you have doubts on any of the above, it may be better to skip the full pay option on the EPS, and simply take home your accumulated EPF balances at retirement.
Also read: Know how to check EPF claim status on UMANG
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