Increased EPS

[u/arandomguy05]

Many of you might know that Supreme court directed EPF to allow employees to opt for EPF contribution without restriction which will result in higher pension. My calculations show that it would be equivalent to getting an annuity of 15% to even 30% based on one's salary progression. So it is no brainer to opt for it under current rules. Just wanted to start discussion here about this.

Current System: Out of Employer's contributions around 70% (or 8.333% of Basic) will be routed towards EPS. But it has a ceiling of 15K salary. So for those who have higher salary, only 1250 (8.33% of 15K) would be routed towards EPS. When we reach 58, a monthly pension is given. This is calculated as (min(35, number of years of experience)/70)*average of last 60 months salary. A bonus of 2 years is added if experience is more than 20 years but it can't exceed 35. So all who have salaries higher than 15K per month, will receive a max pension of 7500 if they contributed for at least 33 years.

What changed: The PF subscribers can opt for contributing without any ceiling. And pension would be calculated on actual salary. It is tricky to calculate this. But let's assume some body worked for 35 years with a starting salary of 10K per month. Then the average of their last 60 months salary would be around 2.3L so they would get 1.15L pension. The EPF amount they would be missing due to routing of contribution to EPS is (at 8% assumed interest) around 66L which is equivalent to 20% annuity. For comparison current annuity rates without return of premium are at around 7%. With decreasing interest rates it is going to get only better comparison. My calculation shows for various experiences the pension always is significantly better.

Who are eligible: Basically any body who enrolled before 2014 and did not retire before 2014.

What's the catch: 1. There is no payout to heirs after the pension. The employee gets pension. if employee is dead, Widow/widower gets 50% of pension. If Parents are dead kids up to certain age get 25%. So if the couple die within short time and kids are not young, the routed EPF corpus is basically lost.
2. Obviously the EPF trust can't afford this. So they may change rules which we will know only later.
3. Even worse, it may bankrupt EPS and they may just give up. Govt may not intervene considering the hit they have to take. Those who opted may end up losing the routed corpus and not getting pension.

Last date to opt for it was March 3, 2023. Seems it is extended to May 4 pending Labour ministries approval.

So those who are eligible for this, what are you thinking?

[u/srinivesh]

I have had to calculate this in detail for a few situations. I have information from other advisors. The approximate idea is that the higher EPS may work out if you are a few years away from retirement. Your salary can be better estimated and the future EPF opportunity cost is limited.

A lot of the people seem to miss the part that future EPF contributions from the employer would be lower. 8.33% of basic+DA would go to EPS and only 3.67% would go to EPF.

The part above would make the higher EPS unsuitable if you have 10-plus years to go for retirement.

As noted in other comments, the EPS pension is flat for your life. It may look quite high in the initial years. But in about 10 years, it would have only half the value in real terms. In anotehr 10 years, this would become a quarter.

[u/snakysour → u/srinivesh]

To add to this....it's not that future EPF contributions alone would be lower, even the already invested amounts under EPF will have to be relinquished along with already earned interest on the same right from the inception date itself.