What is it?
If you are a member of EPFO, you can now have the option to select a higher pension based on your actual basic salary as of September 1, 2014. According to the most recent policy, older members may seek larger pensions and pay higher EPS contributions at an 8.33 percent rate rather than the monthly limit of a 15,000 pensionable salary.
Doing so can increase your contributions while receiving improved advantages, such as a higher annuity (pension) after retirement.
Eligibility:
You must have been a member of this pension plan (EPS) for at least 10 years and be 50 or 58 years old to qualify for a higher pension (depending on when you joined the EPS). That means if you want to retire before 50, this new plan does not apply.
Pension comparison in both options:
| Option 1 – As per the existing scenario Rs. 1250 contribution monthly in EPS A/c Current Pension Post 58 – if any member of EPF at age 25. ( 33 years of service + 2 bonus years)Pensionable Salary (15000) * Pensionable Service/70 15000*35/70 = 7500 maximum | Option 2 – As per the new option contribution in EPS A/c is 8.33% of Actual Salary without any capping Revised Pension Post 58 – if any one member of EPF at age 25. (33 years of service + 2 bonus years) with Avg. a salary of 2 Lakh Pensionable Salary (Avg. salary of last 5 years before retirement) * Pensionable Service/70 200000 * 35/70 = 1,00,000 per month |
Why should you opt?
- The key benefit of choosing a higher pension is that it enables accumulating a pension corpus, providing a guaranteed income after retirement.
- Defined benefit plan: It implies that the size of your pension is defined based on the number of years you have worked and your average salary and is not affected by changes in the market.
Why should you not opt?
- The money from the PF account will be impacted: The higher pension contribution will increase the monthly pension amount but reduce the EPF lump sum given to employees upon retirement.
- No liquidity: The Employees Pension Plan does not give you the choice of a lump sum withdrawal (EPS).
- No early retirement: The benefit of the EPS system is only accessible after an employee has retired after working until age 58 or after accumulating 10 years of service.
- Fixed pension – The pension received is not inflation adjusted, so the long-term amount received by the pension won’t be sufficient.
- No interest on the sum accumulated – EPS contribution does not earn interest.
- EPS is not tax efficient – While lump-sum EPF payments made after retirement are tax-free, the monthly pension is taxable at your tax slab.
- Suppose Mr. X Age 28, Joined EPF in the year 2001 and has 40k basic pay in the first year of Joining, salary growth is 7% and the ROR on EPF forgone is 8.1%. Then your monthly pension would be Rs.94,780 at the age of 50 (if you are retiring at 50).
- And the annual income will be Rs. 11,37,360, which would attract 30% of the tax slab.
Our view:
It benefits people who want a bigger monthly pension but do not need a sizable lump sum payment upon retirement. However, you might not require a larger EPS pension if you have alternative retirement income options (such as a personal pension or building your retirement corpus through other investments).
Depending on your individual financial condition and retirement objectives, you may decide to choose a greater EPS pension. Before choosing, you should carefully weigh the advantages and disadvantages.
Talk to us for a detailed discussion to help you make a decision.