Higher pension from EPFO: Things to consider before you opt for it

KEY HIGHLIGHTS:

• There will be a reallocation of corpus from the EPF to the EPS scheme from the date of joining the scheme
• There are many other options available where you can decide the type of annuity at retirement
• Take into account that EPFO pays pension after 10 years of service and it starts after attaining the age of 58 years 

You now have the option to increase your pension amount from the Employees’ Provident Fund Organisation (EPFO) by increasing the contribution towards its Employees Pension Scheme or EPS. Under the new rules, you can now contribute 8.33 per cent of actual pay towards the scheme which earlier had a capping of Rs 15,000. 

The EPFO’s new guidelines came two weeks before the end of the four-month deadline given by the Supreme Court. The deadline to apply for the higher contribution is March 3, 2023. It is also important to point out that this option is not eligible for those who joined the EPF after 1st September 2014.

With the higher contribution, you will be able to have a higher pension as it will be calculated on the actual salary (average 60 months salary) at the time of retirement and the total years of service. So, earlier if a member who joined the scheme at the age of 23 and superannuated at the age of 58 could get a maximum of about Rs 7500 as a pension if service was 35 years  (Pensionable Salary X Pensionable Service)/70 = (15000x35)/70 = 7500.  

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But now if you opt for the new rule then your pension will be calculated on the actual basic salary plus dearness allowance, which will in turn increase your pension amount. Suppose at the time of retirement if the average pensionable salary for the past 60 months is Rs 1 lakh then the pension amount works out to Rs 50,000. 

However, before you rush to opt-in because of higher pension income it is important to understand the nitty-gritty of new pension rules:

Corpus Reallocation 

First, you need to understand that there will be a reallocation of corpus from the EPF to the EPS scheme from the date of joining the scheme. This means a large portion of money needs to be paid from the EPF to the EPS to avail higher pension, which will definitely deprive you of the benefits of compounding. 

Hence, it is advisable to work out how much amount you are expecting to receive as pension at the time of retirement and based on that if it is better to let the money grow in EPF. For example, if you are 35 with an average basic salary of Rs 1 lakh over 10 years, then at 8.33 per cent your monthly contribution works out to Rs 8,330. Now to get a higher pension at retirement you need to let go of around Rs 8.5 lakh (8,330-1,250*12*10) from your EPF account to adjust the differential over the period of 10 years of joining the scheme. Also, it is important to point out that the interest accrued on this amount may get reversed. Hence you need to decide whether to let go of the EPF amount for a higher pension at retirement or manage it yourself from the start. 

Less flexibility

EPFO only pays you a monthly pension with no option of lumpsum payment. Moreover. when a subscriber passes away only 50 per cent of that amount is paid to the spouse. Post that there is no lump sum that is paid to the beneficiary of the spouse. Hence opting for the EPS should also depend on your life expectancy assumptions based on individual health and family history. 

In comparison to this, there are many other options available in the market where you can decide the type of annuity at retirement. You can opt for the return of purchase price, the same amount of pension for the beneficiary, and payment of a lump sum to the beneficiary. 

Clearly, with a strict payout of pension amount, the EPS scheme does not offer you much flexibility. Further, it must be noted that the contribution in the EPS does not earn interest the way it does in an EPF. Here you do not have a choice of lumpsum at retirement but instead, you are paid a pension, which is decided at the time of retirement based on the following formula: Member’s Monthly Pension = Pensionable salary X Pensionable service / 70 (Pensionable salary is the average salary in the last 60 months.)

Long Gestation  

A person is eligible to receive a pension from EPFO after completing 10 years of service, provided the person has attained the age of 58 years. So, if you want to retire early then you need to consider whether you want to pay a higher contribution as you won’t be eligible for a pension before 58 years. In case you want to withdraw early, then you can withdraw after attaining the age of 50 years but you will receive a lesser EPS amount. 

Last but not least if you are one who is not comfortable managing your own money then opt for a higher contribution to EPS. Another advantage is when people get a lump sum of money at retirement, they may not use it judiciously. By locking the pension amount from the beginning you do not have the fear of misusing the lumpsum amount. But before taking a decision also keep in mind that dealing with EPFO at times can be a long and tedious process because of the documentation involved.  

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