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The Authorities (EPFO) has supplied a selection to pick out eligible EPF/EPS subscribers to go for greater pension underneath EPS (Staff’ pension scheme).
An choice to earn a better pension throughout retirement.
Who would say “No” to such a proposal?
Nicely, there is no such thing as a free lunch on this world. Whereas there’s an choice to earn greater pension, it comes at a value.
The query: Must you go for greater pension underneath EPS?
On this put up, let’s take a look at the next elements intimately.
- How a lot pension do you get underneath EPS? When does the pension begin and the way lengthy do you get it?
- How do you contribute to EPF and EPS?
- What’s this whole concern about greater pension? And why does this come up?
- Who’s eligible?
- What do you get in case you go for greater pension? What do you lose?
- In the event you go for greater pension, what portion of your EPF corpus might be moved to EPS?
- What are the issues/drawbacks of EPS? These drawbacks would possibly impression your determination.
- Must you go for greater pension underneath EPS? Or must you keep on with the established order?
Mentioned this matter in a Twitter thread too.
How a lot pension do you get underneath EPS?
Month-to-month Pension = (Pensionable wage X Pensionable service)/70
Pensionable wage = Common of final 60 months of base wage (earlier it was final 12 months wage). The pensionable wage is now capped at Rs 15,000. Nonetheless, there’s a approach for previous workers (who joined workforce earlier than September 1, 2014) to get round this cover and earn pension on precise base wage. And that is the supply of all the dispute that we’ll focus on on this put up.
Pensionable service = No. of years of contribution to EPS
I’ve learn in lots of locations that the pensionable service is capped at 35 years for the aim of pension calculation. Nonetheless, I couldn’t discover the supporting clause within the EPS Act. If such a cap is certainly there, it might stream from one other algorithm/rules.
The pension begins on the age of 58. In the event you exit EPS on the age of 58 and have rendered greater than 20 years of pensionable service, 2 years might be added to the pensionable service for calculation of pension.
You will have an possibility to start out pension early (however not earlier than the age of fifty). The pension might be lowered by 4% for yearly of early exit. May defer however not past the age of 60.
Let’s perceive this with the assistance of an illustration.
Your final 60 months’ common base wage is Rs 1 lac. And also you had been contributing as per precise wage (not as per wage cap of Rs 15,000)
You will have rendered 33 years of pensionable service. Since you’ve got labored for over 20 years and are exiting on the age of 58, your pensionable service might be 35 years.
Month-to-month pension = Rs 1 lac X 35/70 = Rs 50,000
- You’ll earn this pension of Rs 50,000 for all times.
- After you, your partner will earn 25,000 (50%) till he/she is alive.
- After your partner, your youngsters (most 2) will earn 25% pension every (Rs 12,500 every) till they flip 25.
- There are a number of different provisions caring for nook instances. You’ll have to examine the EPS Act to see how pension provisions will apply in such instances.
Notice: In the event you had been contributing with a wage ceiling, you’re going to get pension of solely Rs 15,000 X 35/70 = Rs 7,500.
While you see such a system for calculating pension in an outlined profit scheme, you’ll be able to sense this may be gamed. Such a system might have had some relevance within the years passed by however not now. Good that the Authorities has plugged the loophole, a minimum of for the brand new members.
By the best way, how is the pension from EPS funded? It really works by your (your employer’s) contribution to EPS.
How does contribution to EPS and EPF work?
You contribute 12% of your base wage (Primary + DA) to EPF each month.
Your employer makes an identical contribution of 12%. Nonetheless, this 12% is invested in a special method.
Of this 8.33% goes in the direction of EPF (Worker pension scheme). And the rest (3.67%) goes to EPF.
Nonetheless, the wage on which EPS is calculated is capped at Rs 15,000 per 30 days.
Allow us to think about an instance. Allow us to say your base wage is Rs 50,000.
Your contribution to EPF = 12% * 50000 = Rs 6,000.
You don’t contribute to EPS.
Your employer additionally contributes Rs 6,000 to your EPS+EPF.
What’s the breakup?
Employer contribution to EPS = 8.33% X Rs 15,000 = Rs 1,250 (for the reason that ceiling wage of Rs 15,000 will get triggered).
Employer contribution to EPF = Rs 6,000 – Rs 1,250 = Rs 4,750
The Authorities additionally contributes 1.16% of your base wage to EPS topic to a wage cap of Rs 15,000 per 30 days.
This sounds all proper. The place is the issue?
The place is the issue?
The wage ceiling has saved altering. Earlier than the modification within the EPS scheme in 2014, the ceiling was Rs 6,500.
Nicely, that’s additionally high quality. I don’t see any drawback there.
Had the above wage ceilings concrete, every part would have been high quality.
Nonetheless, the EPS guidelines allowed workers to contribute over and above the wage ceiling cap. (Btw, the modification in EPS scheme in 2014 plugged this loophole and the staff becoming a member of the workforce after September 1, 2014 can’t contribute above the ceiling cap of Rs 15,000).
However this doesn’t stop workers who had been member of EPS scheme earlier than September 1, 2014 (and nonetheless are OR retired after September 1, 2014) from contributing above the wage ceiling (Rs 5,000/Rs 6,500/ Rs 15,000). And earn a HIGHER PENSION.
And this has led to all of the confusion.
Notice that EPS is an outlined profit scheme (in contrast to NPS which is an outlined contribution)
How does this result in confusion?
There are a number of pathways.
Case 1
In some instances, your employer caps contribution to EPF to wage ceiling of Rs 15,000 (wage ceiling has saved altering. It was Rs 5,000 earlier. Then to Rs 6,500 and now to Rs 15,000).
Therefore, even when your fundamental wage is Rs 50,000, you’ll contribute solely Rs 1,800 (12% of Rs 15,000). Your employer will contribute 1,250 (8.33% of Rs 15,000) to EPS. And Rs 550 to EPF.
In the event you belong right here, you aren’t eligible for HIGHER PENSION. Why? As a result of you’ve got been contributing solely as per the wage cap.
Case 2
Your employer doesn’t cap contribution. You contribute on precise wage (and never based mostly on wage cap). Precise base wage of Rs 50,000.
Your contribution to EPF = 12% X Rs 50,000 = Rs 6,000.
Your contribution to EPS is NIL.
Employer contribution to EPS = 8.33% X 50,000 = Rs 4,165
Employer contribution to EPF = 3.67% X 50,000 = Rs 1,835
You might be eligible for greater pension.
Nonetheless, there was a technical rule right here the place the worker and employer needed to convey this determination to EPFO inside sure timelines. Provision to Para 11(3) of the scheme earlier than modification in 2014. I reproduce the availability under.
Therefore, there have been situations the place folks had contributed extra to EPS with out explicitly stating this selection.
After they reached out to EPFO for greater pension, EPFO rejected their declare for greater pension (and gave pension as per the ceiling cap) since these workers didn’t specify this feature explicitly with acknowledged timelines. And refunded extra contribution within the EPS to the EPF accounts of the staff with curiosity.
Such workers challenged EPFO within the courts and gained. The Supreme Court docket discovered these timelines arbitrary and dominated in favour of such workers. Eligible for greater pension. You may examine this case about Mr. Praveen Kohli right here.
Case 3
Your employer doesn’t cap contribution. You contribute on precise wage (and never based mostly on wage cap). Precise base wage of Rs 50,000.
Your contribution to EPF = 12% X Rs 50,000 = Rs 6,000.
Your contribution to EPS is NIL.
Employer contribution to EPS = 8.33% X 15,000 = Rs 1,250 (whereas the employer doesn’t cap contribution to EPF, it caps the EPS contribution)
Employer contribution to EPF = 6,000 – Rs 1,250 = Rs 4,750
For the reason that EPS contribution has been made as per the wage cap of Rs 15,000, you’d get pension solely as per the wage cap. Not greater pension.
In the event you belong right here, this current EPFO round dated Feb 20, 2023 will curiosity you.
Why?
As a result of you’ve got an choice to replenish a type and ensure that you really want a better pension now. Since there’s free lunch, EPFO will switch a portion of cash (deficit contribution to EPS together with curiosity from EPF to EPS). On your future contributions additionally, you (your employer) should contribute extra to EPS.
So, greater pension however a decrease EPF corpus. Within the latter a part of the put up, we’ll see how one can consider these decisions.
Who’s eligible for greater pension underneath EPS?
I reproduce an extract from EPFO round dated February 20, 2023.
The round refers to eligibility for exercising this new possibility for greater pension by filling up a type.
- You will need to have been a member of EPS as on September 1, 2014. Due to this fact, in case you began working after September 1, 2014, you might be NOT eligible. OR in case you retired earlier than September 1, 2014, you might be NOT eligible for greater pension.
- Your (and your employer’s) contribution to EPF (as on September 1, 2014) was on the wage that exceeded the wage ceiling cap of Rs 5,000 or Rs 6,500. Let’s say your base wage was 25,000 and also you had been contributing on the precise wage of Rs 25,000 (and never as per wage cap of Rs 15,000). You might be ELIGIBLE even when your EPS contribution was capped however your EPF contribution was on precise wage.
How you can apply for Increased Pension underneath EPS?
The EPFO round lays down the tactic.
You will need to make a joint utility alongside together with your employer to EPF. As issues stand at present, it’s essential to apply earlier than March 3, 2023 (4 months from the Supreme courtroom judgement).
Given the confusion surrounding this matter, I hope the deadline is prolonged.
Counsel you attain out to the accounts group of your employer for the operational particulars.
Must you go for Increased pension underneath EPS?
In the event you go for Increased pension, you’re going to get greater pension. Danger-free. Assured for all times. And that’s the largest benefit.
How excessive a pension will you get?
Nicely, that relies on your common base wage within the closing 5 years of your work life (and years of pensionable service).
Now, you can’t reply this query precisely, particularly if you’re within the non-public sector the place salaries can fluctuate drastically. In case you are working with a PSU and are nearer to retirement, you could have a firmer grip on the reply.
Nonetheless, take educated guesses. How a lot increment you’ve got been receiving the previous couple of years? And with these assumptions, you’ll be able to arrive on the closing pension quantity.
And also you examine that in opposition to the alternate options? Don’t you?
Firstly, the upper pension comes at a value. Your EPF corpus will go down as a good portion of your EPF corpus might be shifted to EPS scheme. Your future contribution to EPF can even fall since you’ll now contribute extra to EPF.
After retirement, you’d get this corpus and you’ll make investments this cash in financial institution fastened deposits, Authorities Bonds, SCSS, PMVVY and even annuity plans to generate common retirement earnings.
So, it’s essential to see, how a lot EPF corpus are you foregoing? And the way simple or tough it’s so that you can generate the same degree of earnings utilizing this corpus? If you are able to do that simply, then preserve the established order. In the event you can’t (the speed of return might be fairly excessive), then go for a better pension.
In the event you go for Increased pension, what portion of EPF might be shifted to EPS?
Within the aforementioned EPFO round dated Feb 20, 2023, EPFO has talked about, “The strategy of deposit and that of computation of pension will observe by subsequent round”.
Deposit means deposit from EPF to EPS. To be sincere, it’s unfair to anticipate workers to choose till EPF comes out with these calculations. Bear in mind, the Supreme courtroom handed its judgement on November 3, 2022, and gave 4 months (till March 3, 2023) to members (workers) to make their selection. And EPFO says on Feb 20, 2023, that they’ll concern a subsequent round for calculations.
Let’s do some crude calculations and see how a lot might be moved out of your EPS corpus.
Let’s say you began working within the yr 2001.
Your base wage firstly was Rs 20,000 and grew at 5% each year. I’ve assumed that EPF returned 8.5% p.a. all through the tenure.
The wage cap was Rs 6,500 till September 2014 and Rs 15,000 thereafter.
When you had been contributing to EPF on precise wage, the contribution to EPS was solely as per cap.
Within the first yr, Base wage =20,000
Worker EPF contribution = 20,000 * 12% = Rs 2,400
Employer EPS contribution = 8.33% * 6,500 = Rs 542 (if this had been on precise wage, employer would have invested Rs 1,667)
Employer EPF contribution = Rs 2,400 – Rs 542 = Rs 1,858 (if EPS contribution had been on precise wage, this could have been Rs 2,400 – Rs 1,667 = Rs 733
The deficit contribution to EPS = Rs 1,667 – Rs 542 = Rs 1,125
Now, this deficit contribution to EPS (that went to EPF) should be shifted again to the EPS scheme. And the curiosity on this deficit contribution too. And this have to be achieved to your whole previous service.
How a lot will this quantity be?
It will depend upon the trajectory of your wage progress. The upper your wage, the upper the deficit contribution. And the extra (in proportion phrases) you’ll have to switch from EPF to EPS.
Proportion of switch= Whole deficit contribution to EPS/Whole Contribution to EPF
On this instance, whole contribution to EPF (contains each employer and worker) = Rs 21.63 lacs
Whole deficit contribution to EPS = Rs 6.06 lacs
Proportion of EPF to be transferred to EPS = Rs 6.06/21.63 lacs = 28%
You too can examine the EPF corpus. Present vs the EPF corpus you’d have with out EPS contribution being capped. You’ll get the identical reply.
I did very crude EPF calculations (not actual). Present corpus = ~51.66 lacs
EPF corpus after eradicating EPS cap = Rs 37.14 lacs. A distinction of 28%.
Notice this distinction could be greater for a better base wage.
On this instance, if we alter the beginning base wage from Rs 20,000 to Rs 50,000, the switch proportion rises to 32%.
If beginning base wage drops to Rs 10,000, the switch proportion falls to 19.8%.
And that’s not it
In the event you go for greater pension, your employer’s future contribution to EPS will rise and to EPF will fall. That can even decelerate the expansion of EPF corpus.
Extending the instance to pending 10 years of service, in case you go for greater pension, you’d finish with Rs 1.04 crores of EPF corpus after 10 years.
Had you caught with decrease pension, you’d have Rs 1.46 crores.
What would be the pension?
Common base wage within the final 5 years = Rs 86,645
Month-to-month pension = 86,645 X 35/70 = Rs 45,798
Even in case you caught with decrease pension possibility (establishment), you’d get pension of Rs 7,500 (Rs 15,000 X 35/70).
Distinction of Rs 41.68 lacs in EPF corpus.
Distinction in EPS pension = Rs 45,798 – Rs 7,500 = Rs 38,298
Now, for this Rs 41.68 lacs to generate earnings of Rs 38,298 per 30 days, it must generate a return of 11% p.a. That’s not simple.
such an evaluation, choosing greater pension seems to be like a better option.
However EPS has its personal set of issues.
What are the issues with pension underneath EPS?
Firstly, you get the complete pension till you might be alive. After you (the first pensioner passes away) your partner will get the pension however solely 50% of the unique quantity. And after the partner passes away, a most of two youngsters will get 25% every till they’re 25.
I’m imagining a morbid situation, however the household doesn’t get as a lot in case you (the first pensioner) go away too quickly after retirement.
Had you caught with a decrease pension, you’d have gotten a a lot larger EPF corpus at retirement. Now, this EPF corpus belongs to you. And after you, it belongs to your loved ones. So, this extra EPF corpus might not have the ability to generate as excessive earnings as EPS however this EPF corpus belongs to you and your loved ones.
Secondly, the pension relies on the final 5 years (60 months) of base wage. So, in case you determine to take a step off the accelerator when you cross 50 and choose up a job that pays much less, your common earnings throughout the closing 5 years of your working life might fall. And therefore the pension might be decrease.
As an illustration, allow us to assume your common base wage between the age of 48 and 53 was Rs 2 lacs. And the typical base wage between 53 and 58 years was 1 lac. The pension could be calculated for the typical wage within the final 5 years i.e. Rs 1 lac. That you’re incomes extra earlier than that doesn’t matter.
Thirdly, if you wish to retire early, then your pensionable years of service might be much less, and the pension will accordingly be decrease. Plus, the pension quantity doesn’t begin earlier than the age of fifty. Allow us to think about an instance. You began working on the age of 25 and labored till the age of 45. 20 years of service. Let’s additional assume that your common wage within the final 5 years was Rs 1 lac. Therefore, your month-to-month pension could be Rs 1 lac X 20/ 35 = Rs 57,142.
Nonetheless, in order for you this full pension, you’ll have to wait till the age of 58. However you retired on the age of 45. There may be an possibility to start out drawing earlier however not earlier than you flip 50. The early withdrawal comes at a value. You get 4% much less for every year of early withdrawal. So, in case you begin at 50, you’re going to get 8 X 4% = 32% much less. Rs 38,857 as a substitute of Rs 57,142.
Lastly (and I’m not certain about this), the choice for a better pension is a joint possibility exercised by you and your employer. You might be in a non-public job and have opted for a better pension (and your present employer is comfortable with this). You turn your job after a number of years and the brand new employer has a special coverage about contributions. Caps the contribution as per wage ceiling. You may ask them to make an exception for you, however it is a headache. This chance would make me extraordinarily uncomfortable.
Notice: The newest EPS guidelines additionally present for workers to contribute 1.16% of Primary wage (for the portion exceeding Rs 15,000) to EPF in the event that they need to obtain a better pension.
In the meanwhile, the Supreme Court docket has put this on maintain. For extra on this, confer with web page 7 of this doc. Since this pertains to funding of EPS pool, you’ll be able to anticipate this to return to you in some type or the opposite later.
What’s the closing verdict?
There isn’t any one-size-fits-all resolution.
Going by numbers (and as now we have seen above), choosing the upper pension will certainly provide you with a really excessive pension. It could be tough to duplicate the identical degree of risk-free earnings out of your EPF corpus.
Nonetheless, the upper pension comes with many ifs and buts. Many caveats. You lose flexibility.
You will need to weigh the upper pension in opposition to these issues in EPS.
I get extraordinarily uncomfortable in case you take away flexibility from my investments. Therefore, please admire my biases in my closing feedback.
In case you are nearer to retirement and are comfortable with all of the caveats (as talked about within the earlier part), you’ll seemingly be higher off by signing up for Increased pension. However examine the calculations earlier than taking a closing name.
In case you are youthful (35-40), connect higher weight to issues/caveats/lack of flexibility in EPS.
Disclaimer: Whereas I’ve tried my greatest to know and clarify the subject intimately, there could also be shortcomings in my evaluation or my understanding of the EPS scheme and the EPFO round.
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