Should You Choose higher EPS Pension offer by EPFO & contribute a lumpsum from EPF in 2023? The EPFO subscribers have been in a dilemma about this over the last few months. And rightly so. The impact of the decision is far reaching on retirement planning.
As per the recent EPF amendments (2023), the Employees’ Provident Fund Organization (or EPFO) has allowed its subscribers to opt for a higher pension at retirement, by increasing their contribution towards the Employees’ Pension Scheme (EPS). While a higher pension is indeed attractive option, the members would also have to transfer some funds from their provident fund (EPF) to the EPS pension fund going back until September 2014.
While it is difficult to answer what is the right decision, let’s discuss this entire development and hopefully, arrive at something tangible that helps in decision making.
What is the Existing EPS Pension Rules?
Till now, both the salaried employee and their employer had to contribute 12% each of the employee’s salary (Basic + DA) to the EPF. While the employee’s full part went to the EPF, the employer’s contribution was split into 2 parts – 3.67% went to EPF and the rest 8.33% went to the EPS. But the catch was that the salary on which EPS was calculated was capped at a maximum of Rs 15,000 per month*, even if the actual salary was higher.
*The maximum salary limit of Rs 15,000 monthly has seen revision in past. Initially at the time of introduction of EPS scheme, the maximum was just Rs 5000 per month. This was then increased to Rs 6500 and, finally from 1st September 2014, to present figure of Rs 15,000 per month.
Now EPS is to provide employees with pension after the age 58 if the employee had been in service for at least 10 years across one or more jobs.
What would be the pension as per the rules?
The monthly pension is computed according to the following formula:
Monthly pension = (Pensionable Salary x Pensionable Service) / 70
The ‘Pensionable salary’ here is now calculated as the Average of last 60 months of base salary. Earlier it was the average of last 12 months salary. The ‘Pensionable service’ is the number of years of contribution to EPS.
The pension thus calculated begins from age 58 and stays the same throughout the life of the pensioner.
Related Reading – EPFO’s New Formula for Calculating Higher Pension on Actual Salary (Circular June 2023)
What is the New EPS Pension Rule Change 2023?
As per the latest amendment, the new EPS rules allows EPF subscribers to contribute 8.33% of their ‘Actual’ basic salary (instead of the Rs 15,000 upper cap) towards the EPS to earn a higher EPS pension at the time of retirement.
Now as the EPFO’s circular in February 20, 2023 (link), the employees who had been contributing towards the EPF on the full basic salary and had still not opted for a higher pension earlier, and those who were members of EPS members even prior to cut-off date of 1st September 2014, can opt for a higher pension now. In addition, this new change (if opted for) requires EPFO subscribers to contribute the extra part of the 8.33% of Basic + DA on actual (- Rs 15,000) salary retrospectively via one-time deduction from their EPF corpus.
The new rules allow subscribers and their employers to jointly apply for a higher pension under the EPS. The extended deadline to apply for higher EPS pension is 26 June 2023. This was extended from earlier last date of 3rd May 2023.
Also, the government via a notification dated 4 May 2023 (link), has now enhanced the employer’s contribution to the EPS account from earlier 8.33% to 9.49% on EPS contributions above Rs 15,000 per month (the current wage ceiling) for those employees who are eligible to opt for a higher pension from EPS. It has also been clarified by the ministry that the extra 1.16% (difference in 9.49% and 8.33%) would be coming from the employer’s side and from within the overall 12% of the contribution of the employers into the provident fund. So those opting for a higher pension will no longer have to contribute the additional 1.16% from their salary that is above the wage ceiling of Rs 15,000. So if an employee opts for the higher pension, there will be no additional burden for paying this extra 1.16% from own contributions.
But there still need to be transfer of some funds from provident fund (EPF) to the EPS pension fund, from September 2014 retrospectively. And this is the key point for everyone. For most people, a substantially large sum of several lakh rupees needs to be paid, which will come from the EPF corpus and shifted to the EPS corpus to avail higher pension at retirement.
As per the latest EPFO circular issued on 11 May 2023, new clarifications have been offered to the employees about the method of calculating past dues that must be deposited into the EPS account if they are opting for a higher pension. And how this will come out of EPF or otherwise.
The article in Economic Times (link) provides the detail and I quote partially (with few edits) from the same below –
If there is sufficient balance in Employees ’Provident Fund (EPF) account, the past dues will be transferred to Employees’ Pension Scheme (EPS) account from the EPF account. But in case of a deficit, the pensioner/employee will have to pay the gap amount from their bank accounts. This transfer/deposit from EPF to EPS account will happen only once the joint application form for a higher pension is accepted by the EPFO. Further and naturally, there will be interest clawback from the EPF account due to this transfer.
How will EPFO calculated the dues to be paid for higher pension?
As per the circular, dues that are required to be transferred to the EPS account must be calculated month-wise in the following manner:
- 8.33% of the employer’s share on higher actual pay (w.e.f. November 16, 1995, or the date the pay exceeds the wage ceiling, whichever is later)
- 1.16% of employer share on higher pay above Rs 15,000 per month w.e.f., September 1, 2014, towards increased contribution.
- All the deposits already deposited to the EPS account will be deducted from the sum of (a) and (b) mentioned above
- The historical EPF interest rates announced by EPFO will be taken to calculate the interest amount that must be taken back from the EPF account to recover the accrued interest on past missing EPS contributions.
Once the total dues (missing contribution and accrued interest) from the past missing EPS account is calculated, then the field office will inform the pensioner/employee about the dues and any amount that needs to be deposited a fresh or diverted from EPF account.
The information will be sent to the pensioner/employee through the last/current employer. The EPFO will inform them about the dues that have been received through the last/current employer. The information will be further provided for the amount that has to be diverted from the EPF account to the EPS account. The written consent will be taken from the employee for such transfer to take place. If the EPF account has an inadequate balance, then EPFO will inform the amount that can be diverted from the EPF account (if any) and the shortfall that needs to be deposited into the EPS account. Here also, written consent will be taken from the employee to divert money from EPF to EPS account.
The EPFO will provide a break-up of the total amount that is due towards the EPS account, an amount that will be diverted from the EPF account along with interest and the amount that must be deposited by the EPF account holder along with the interest.
EPFO will allow 3 months for a pensioner/employee to deposit money and give consent for the diversion of money.
Enough of the details. And these will never be enough to be honest.
Now let’s come to the main question.
Should you opt for Higher Pension under Employee Pension Scheme?
The question is simple but the answer is not. There are too many factors and variables at play here and still, there are too many unknowns. But like many things in life, you cannot wait to have the 100% information to decide. You need to work with 70% information and decide.
So let’s list down the reasons on both sides – why you should opt for higher EPS pension and also, why you shouldn’t opt for it.
I know most of you want a clear cut answer and put an end to this dilemma. But that is not going to happen. No one can tell you what works best for you. So once you go through both the lists, you may have a little more clarity than what you started with reading this article.
So here are the reasons on both sides.
Why you SHOULD OPT for Higher EPS Pension?
- If you opt for the higher EPS pension, you are guaranteed risk-free pension for life. And that is the biggest advantage. No ifs or buts. You get the average of the last 5 years or 60 months’ salary as your fixed pension for life. So you can have a look at your current monthly salary and income trajectory in past. You can then estimate as to how much your salary is likely to be in your 50s and the type of increments you are likely to get between today and then. That will give you some broad numbers to assess how much your monthly pension might be.
- The pension you get is taxable but it is not market-linked. So you keep getting a regular, fixed pension as per the fixed formula (average of the last 5 year’s or 60 months’ salary). So there is no risk about market going down and then what will you do as this is a defined-benefit scheme. It works the same in both good or bad economic conditions.
- If your pensionable service period is quite long, then you will see a lot of alary increases. And assuming you keep working till late 50s, your pension as calculated by the formula will also be quite high.
- Many people consider annuities, SCSS, POMIS, FD monthly interest, etc. as viable alternatives to generate regular income in retirement now a days. But interest rates are high currently because India is a developing country. And chances are that in 15-20 years, we will be a lot more developed and when economy matures and the growth moderates, the interest rates in the economy might also be a lot lower. Like what is generally the case in US, Europe, etc. If that happens, it will be very tough to find similar high-interest instruments 15-20 years later when you retire. So, in that case, a guaranteed pension that is based on last 5 year’s average salary may seem like god-sent at that time.
- In India, retirement planning is ignored and doesn’t get the importance it deserves. Many people are busy with other goals like house purchase, children’s future, etc. and hence, saving for retirement goes down the priority list. So, this option to opt for higher pension can be very useful for those in middle ages and who have not been able to save properly or enough for their retirement.
- Many people are not too comfortable dealing with a lot of money. So if they don’t opt for higher pension, and instead get bigger EPF corpus on retirement, the onus will be on them to create a solid retirement income strategy. And to be honest, a large majority of these people will not be to do that very well. So for such people, maybe higher pension is more useful.
Why you SHOULD’NT OPT for Higher EPS Pension?
- The higher pension you get at the start of retirement remains fixed for life. It doesn’t increase with inflation. And we all know, what a monster inflation can be.
- If you opt for a higher pension, there will be a reallocation of part corpus from the EPF to the EPS. So a large portion of money will move out of EPF, which otherwise could have compounded for years left in your service. Therefore the benefits of compounding are reduced to shift from EPF to EPS in case one opts for higher pension.
- If you don’t want to work till very late in life, then you may want the option to retire early one day. If you are a fan of early retirement, then opting for a higher pension may not benefit you as you will quit work much before your peak earning years (in late 50s) and you will also need to have at least 10 years of employment to be eligible for EPS pension.
- And what if you don’t quit working completely and instead shift to calmer, lower paying jobs later? In that case too, the formula that decides EPS pension based on last 5 year’s average salary will work against you as you will be working on reduce pay during last few years of professional life.
- For example, say your average salary during age 47-52 was Rs 3 lakh monthly. But you decided to switch to a job where average salary during age 53-58 years went down to Rs 2 lakh. So the pension would be calculated on the average salary in the last 5 years i.e. Rs 2 lakh. It doesn’t matter whether you were earning more before that.
- In EPS, the retiree will get 100% of the calculated pension during his/her lifetime. But the spouse only gets 50% of the pension in case of demise of the pensioner. This is not the case in EPF where entire corpus is paid out to the spouse or nominee in such a scenario.
- There are lot of talks about the rising deficit of government organizations. And this will increase further as pension and PF liabilities grow. So there is another risk of what might happen after 15-20 years and how easy it will be for EPFO etc. to maintain high payouts. It could be a strain on the finances of the retirement fund body in future. A risk not worth ignoring as it can come back to haunt you later in life when you are much older.
- If you want the full flexibility to manage your retirement corpus on your own, then you are better off not opting for higher pension. Instead, you will get a large EPF corpus that you can use to deploy via retirement bucket strategy to generate income as well as invest for growth for inflation-beating returns.
All this might be too much to process, I understand that. But you need to think hard and take a call. It will not be easy with colleagues around you giving different views and making different choices. But this is a not a decision that will have one right common answer. So choose accordingly.
Whatever you decide, please Don’t rely Only on EPF or EPS for retirement!
For most small savers, if you are under the assumption that the EPF corpus you have been building would be enough to meet your retirement needs, then you are mistaken. You shouldn’t rely just on EPF and regular mandatory contributions for your retirement needs.
Don’t get me wrong. I am not trying to write off EPF as an investment option. In fact, I would say that when it comes to retirement, it is one of the most solid and best debt products that Indians have access too. The EPF (till very recently) enjoyed the EEE (exempt-exempt-exempt) status, i.e. it is tax-free at the stage of contribution, interest amount accrual as well as maturity amount withdrawal (now interest on employee contribution above Rs 2.5 lakh per year will be taxed).
All I am saying is that you need more than EPF. You need to look beyond EPF when it comes to retirement planning. Unless you are a totally risk-averse investor, you need to invest in equities too. To ensure that you don’t outlive your retirement corpus, it is very important to have a significant equity exposure (at least during the initial working years). Also, just looking at debt as an investment, in the long run, goes against the basic idea of the risk-reward spectrum. In the long term, equity delivers a better return than debt. There is an urgent need to consider equity as part of the overall retirement plan. And the best way to invest in equities is via monthly SIP in equity funds.
It is best to spread your retirement savings among multiple baskets instead of just concentrating in a single investment option.
In the end, all I can say, to summarize is that if you are looking for a risk-free, fixed and guaranteed pension income and you are comfortable with a lower lumpsum EPF corpus at the time of retirement then you can think of moving into higher EPS pension. But if you want a bigger tax-free EPF corpus and the flexibility then you are better off without higher pension option.
I hope you found this detailed article on Should I opt for higher EPS pension by contributing a lump sum from EPF in 2023, useful. Do share it with others as well if you feel it will help them.
Useful links (EPFO circulars, etc.) –
Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made and the article itself, is for general educational purposes only. There are regular updates being issued by EPFO via circulars which may, in future, change the rationale for selecting between the two options discussed in this article. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before investing.