Being a part of the EPF (employee provident fund), opting for the pension has a few operational aspects with financial implications.
The calculation for the higher payout, how the additional pension would be funded, does your spouse get any pension after your time (or do your children), and is it beneficial to opt for it overall – these are some of the key factors that should guide you towards making a decision.
Here’s more on the higher EPS payout and the attendant pros and cons.
How higher pension works
For calculating the pension under the new rules, the pensionable salary cap has been removed.
The following formula is used to compute the monthly salary.
(Pensionable salary * Years of service)/70.
The pensionable salary includes your basic and dearness allowances now. It was capped at ₹15,000 earlier.
The maximum years of service are taken as 35 and the pensionable salary would be the average pay of the last five years of service. To be eligible for a pension payout from the EPS, you need to have put in 10 continuous years of service with regular contributions.
If your average basic pay for the last five years of your service is ₹1 lakh, you would get ₹50,000 as monthly pension (100000*35/70).
Funding the higher payout
Presently, from the employer’s contribution of 12 per cent of basic pay plus DA, 8.33 per cent was allocated to the EPS and the remaining 3.67 per cent to EPF. The government used to contribute 1.16 per cent for pensionable salaries of up to ₹15,000. Since the pension cap of ₹15,000 was done away with, the Apex Court asked the EPFO to find ways to fund the deficit.
Now, the EPFO has decided that the additional 1.16 per cent will also come from the employer’s contribution. Therefore 9.49 per cent (8.33 plus 1.16) contribution will go towards EPS.
So, the corpus that goes towards your EPF will reduce, to that extent, from the employer’s side.
Not just that, since the new regulations are retrospective in nature, past dues will also be recovered from your EPF corpus. So, from the time you joined (effective November 16, 1995) or the time when the basic pay exceeded the pension wage ceiling, whichever is later, 8.33 per cent of the employer’s share will be calculated. And an additional 1.16 per cent will be payable from the time the wage exceeded ₹15,000.
These amounts will be recovered from your existing EPF account, with interest being the interest you earned on the corpus, and diverted to your EPS account.
In case of a shortfall despite recovering from your EPF, you will have to pay the remaining amount from your pocket via cheque or online mode. Your field office of EPFO will have all the details and calculations of all amounts.
Pros and cons
For subscribers of EPS, the good part is that they will receive half their last basic pay as pension, which can be substantial. Since the last few years of your career are the ones where you are likely to earn the most, the pension amount can easily take care of a good part of your monthly income needs post retirement. You can receive the pension from 58. But if you postpone it by a couple of years, you will get an additional 4 per cent a year as pension.
Those investors who have sufficient allocation to mutual funds, the NPS (national pension system), and fixed-income avenues – that are directed towards children’s education, their wedding and a good part of your retirement – can opt for higher pension. If the pension at retirement is high enough, you can even avoid drawing from your NPS or mutual fund corpuses and let them grow till such time as there is a shortfall.
But remember that your service period will be a key determinant of your pension. Therefore, those who still have a couple of decades may be well-placed to benefit from the higher payout. You should be willing to work till 58 or 60. This higher EPS should be avoided by those who wish to retire early. Pension can be taken after 10 years of service and less than 50 years of age, but the pension is reduced by 4 per cent per year from the normal course at regular retirement.
The other key advantage with EPS is that after your time, your spouse will receive 50 per cent of the amount as pension for life. So, there is a certain visibility to cashflows.
But the disadvantage with the pension scheme is that there is no scope to return the accumulated corpus, which an annuity product does. So, in case of an unfortunate event immediately after retirement, the pension goes to 50 per cent levels to the spouse, with no recourse to the accumulated amount.
Besides, your EPF corpus would be withdrawn to bridge the shortfall, so your final corpus would be less. If you have to shell out even more, it may not be worth it.
Overall, a higher EPS may suit relatively high earners with excellent other investments currently, and those with a couple of decades of service left.
Others can safely skip the option and retain the present payouts.