Before you decide to opt-in for the higher pension income, it is essential to understand the new pension rules’ details, including corpus re-allocation
- Updated May 01, 2023, 9:24 PM ISTHigher EPFO pension: Here’s how monthly pension and corpus reallocation from EPF to EPS will take place
When it comes to personal financial planning, prioritising retirement planning is essential. While loans can be obtained for other financial goals, there are no loans available for retirement expenses. Unfortunately, there are limited options for assured returns for long-term investments. However, the EPFO offers a solution for retirement planning with its EPS scheme that provides higher pension benefits, ensuring much-needed financial security.
Additionally, this scheme promotes the principle of saving before spending, which is a wise financial practice. However, it is important to note that opting for the EPS scheme should only be done after a thorough analysis of an individual’s financial status.
In certain conditions, higher contributions may be suitable while in others might not. But while comparing the difference in a pension you also need to understand that The Employees’ Provident Fund Organisation (EPFO) offers only a monthly pension and does not provide the choice of a lump-sum amount. In the event of the subscriber’s demise, the widow/widower receives 50 per cent of the employee’s pension, and, for minor children, this amount is 25 per cent of the amount received by the widow/widower (maximum two children).
Unlike EPF, where you can choose to receive a lump sum at retirement, EPS pays out a pension amount determined at retirement using the formula: Average Salary for the last 60 monthsXPensionable Service/70. If you complete 10 years of service and reach the age of 58, you are qualified to obtain a pension from EPFO. If you withdraw early, you may do so after turning 50, but you will receive a reduced monthly payment.
Therefore, while deciding to opt for the Employee Pension Scheme (EPS) one should also take into consideration one’s assumptions regarding their life expectancy, based on their individual health and family history.
Here’s how your pension amount will be calculated if you opt for a higher pension
How is the higher pension amount calculated? By making a higher contribution, you can receive a higher pension since it is based on your actual salary (average of Basic salary + DA of the last 60 months) at the time of retirement and the number of years you served. For instance, a salaried person who retires after 30 years of service would have received a maximum pension of around Rs 96,000, assuming an average salary of Rs 2,10,000 for the last 60 months [(Pensionable Salary x Pensionable Service)/70 = (2,10,000x 32)/70 =]. Here 32 years are taken considering if an employee retires at the age of 58, having served for more than 20 years and is eligible for a pension, their service period will be increased by 2 years as a weightage. The maximum pensionable service period is capped at 35 years.
So, if a member does not opt for a higher pension will get a maximum of about Rs 6,857 as a pension assuming service of 30 years (Pensionable Salary X Pensionable Service)/70 = (15000×32)/70 = 6,857.
The difference is pension amount is huge as by opting pension on a higher salary your monthly pension post-retirement can jump up by 14 times from Rs 6,857 to Rs 96,000.
Corpus reallocation from EPF to EPS
Before you decide to opt-in for the higher pension income, it is essential to understand the new pension rules’ details. One such detail is corpus re-allocation, wherein a significant portion of money needs to be transferred from the EPF to the EPS scheme to avail higher pension. However, no clear guidelines have been shared from EPFO yet to make the corpus reallocation calculations transparent. “No guidelines have been shared by EPFO yet on the calculation of corpus reallocation. We have assumed calculations based on the information available in the public domain,” said Shantala Kumble, Senior Vice President, International Money Matters, a SEBI-registered investment advisor.
Therefore, it is recommended to estimate the expected pension amount at retirement and decide whether to let the money grow in EPF or transfer it to the EPS scheme. “Continuing the above example, to get a higher pension at retirement, you need to transfer around Rs 20.17 lakh from your EPF account to adjust the differential over the 30 years of joining the scheme. The calculation is based on the assumption that your total actual salary is Rs 2,75,96,009 over the period of 30 years. However, it is still not clear whether the interest accrued on this amount will get utilised for the same,” said Kumble.
Procedural hassles
Although the deadline to apply for a higher pension from the EPFO is May 3, 2023, there is still a lack of clarity among individuals regarding the necessary documentation and the process for computing the transfer amount from EPF to the Employees’ Pension Scheme (EPS) if they choose to opt for a higher pension.
“There is no clarity with regard to the procedure which will be adopted by the PF authorities for transferring the amount from the PF fund to the Pension fund and also the method for calculating the amount to be transferred from the PF fund to the Pension fund. PFO has not clarified these points and hence, there is total confusion among the claimants,” said BC Prabhakar Advocate and President of Karnataka Employers’ Association.
The Supreme Court, in its November 2022 order, ruled that employees who were part of the EPF before or on 01.09.2014 but could not apply for higher pension, can now submit fresh options within a period of four months which has now been extended up to May 3, 2023. However, the process for submission of joint application by the employees was extremely complicated particularly a mandatory requirement in the form that required furnishing details of the option under para 26 (6) of the Scheme, 1952. Clause 26(6) allows employees to jointly request with their employer to contribute a higher amount to the fund, exceeding Rs 15,000, to claim a higher pension. The ceiling of Rs 15,000 was introduced in the EPS Scheme in 2014.
The Kerala High Court while recognising the enabling nature of Clause 26(6) and the proximity of the cut-off date i.e. May 3, 2023, directed the EPFO to make provisions in the online facility to furnish options without production of the document under Clause 26(6).
Published on: May 01, 2023, 2:29 PM IST