Application Deadline About To END: 6 Helpful Factors To Decide Whether You Should Apply or Not For Higher EPS Pension

The 26th of June is near for applying for a higher pension under the EPS. Many EPS members still need to decide whether to apply for a higher pension. 

The EPFO (Employees' Provident Fund Organisation) has addressed and clarified many doubts regarding the application process, documentation, and computation methodology. 

However, it's important to note that the benefit of the higher pension will vary for each EPS member. The attractiveness of the EPS pension may differ for different employees.

Making a decision about applying for a higher pension under the pension scheme involves considering various factors. It can be challenging for someone without specialized knowledge to determine the value of this option without receiving a final computed sheet from the EPFO that includes all the details. 

Obtaining this information requires applying for the option and may take time. However, there are other broader factors that can help you assess whether it would be a beneficial decision or not.

The Impact of Expected Service Length on Your Pension

In the current EPS pension formula (Pension = Pensionable service x Pensionable salary / 70), two main factors determine the pension amount: the length of eligible service and the pensionable salary. The longer you have worked and contributed to the EPS, the higher your pension will be. Additionally, if you complete 20 years of eligible service with EPS contributions, you will receive a bonus of 2 years added to your service length, resulting in an increased pension amount.

Follow these instructions to estimate your Pension

To obtain a general estimate of your pension under EPS 95, you can use the following guidelines, taking into account the length of your service and your pensionable salary (average salary of the last 60 months). It's important to note that if you have completed 20 years of service with active contributions under EPS 95, you should also include a bonus of 2 years to your service length.

The salary level during the last five years of service

Your pensionable salary is another important factor that determines your pension amount. Prior to September 1, 2014, only the average of the past 12 months' salary was considered. However, this changed after September 1, 2014, and now the average salary over the past 60 months is taken into account for calculating your pensionable salary.

Typically, salaries tend to increase over time, reaching their peak at the time of retirement. However, when a longer average period is considered for calculation, it includes a longer duration of lower salaries. 

As a result, the average salary decreases, which in turn lowers the pensionable salary and ultimately reduces the final pension amount.

Individuals who experience significant salary increases, particularly during the later years of their service, will have a higher pensionable salary, resulting in a higher pension amount. Conversely, if your salary has mostly remained stagnant, opting for the higher pension option may not provide substantial benefits.

What portion of your service period under EPS is accounted for prior to September 2014?

In order to address the issue of the additional 1.16% contribution, the EPFO has created a new mechanism. This rule has been in effect since September 1, 2014. Under this rule, 8.33% of the employer's 12% contribution is allocated towards EPS for salaries up to Rs 15,000 (current wage ceiling). 

Additionally, for any contribution made above Rs 15,000, an extra 1.16% is deducted from the employer's 12% contribution based on the actual basic salary. In simpler terms, 9.49% out of the employer's 12% contribution for salaries above Rs 15,000 will be directed towards the EPS contribution.

The new contribution rule, applicable since September 1, 2014, affects both future and past contributions. While your investment amount increases after this date, the return remains the same, resulting in a lower effective yield on your investment. 

Similarly, those who started working in 2006 are expected to have a higher return than those who joined in 2013. Despite the lower return, individuals who join later still benefit from a higher Internal Rate of Return (IRR) compared to many other fixed-income options currently available. For example, a person who joined in 2006 in the aforementioned scenario would receive a return of 13.1% after 30 years of service and a post-retirement life of 15 years.

What can be the expected return after retirement?

It's important to consider that the accumulated funds in EPS 95 will not be refunded to the legal heirs of the pensioner or their spouse upon their demise. This is a crucial factor to keep in mind when deciding whether to opt for a higher pension. The longer your post-retirement life, the greater the benefits of the higher pension will be. 

Therefore, it's essential to compare the Internal Rate of Return (IRR) on your expected post-retirement life with the rate provided on an annuity option that doesn't include a refund of the purchase price. This option typically offers a higher return compared to an annuity option that refunds the accumulated funds to the legal heirs after the pensioner's demise. Many annuity service providers or life insurance companies offer the latter option.

For most individuals, having a service length of 20 years or more and an average salary growth of 7.5% can result in a double-digit Internal Rate of Return (IRR) for a post-retirement period of 15 years. This offers much better returns compared to the current annuity rates. 

As India's GDP surpasses $10 trillion, economic growth is expected to slow down, inflation is likely to remain low, and interest rates are expected to decrease significantly. This poses a significant challenge for individuals who have a working life of 10 years or more to achieve such high yields at the time of retirement. Therefore, if you have the opportunity to obtain assured high returns from government-backed institutions, it is worth considering this option.

Is Your EPF Contribution Decayed?

Many employees have faced repeated interruptions in their EPF/EPS savings. If an individual hasn't completed 10 years of service, they have the option to withdraw their EPS contributions. When changing jobs, many people choose to withdraw their EPS funds, which leads to a shorter period of active EPS contributions. Those who have made frequent EPS withdrawals may not find the higher EPS option as advantageous as those who have consistently contributed without any withdrawals throughout their employment history.

Also Read: Special Bank FDs With Higher Interest Rates Ending Soon

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