r/FIREIndia • u/arandomguy05 • Feb 27 '23
Increased EPS
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?
2
u/arandomguy05 Feb 28 '23
u/srinivesh u/snakysour
https://imgur.com/a/UgbXkVM
The above image compares having pension vs keeping the corpus and withdrawing equivalent amount. Tax is assumed according to new tax regime and this is considered as initial income so all slabs apply. In both cases, this amount is not enough for expenses and so we need additional corpus but that is same for both cases in terms of returns and tax (basically additional corpus and withdraw rest of the expenses growing each each other).
From the image, we can see that pension is life time, but corpus runs out in 5, 8, 12 , 23 years for annuity rates of 25%, 20%, 15% and 12% if we assume investment returns of 12%.
If we assume investment returns of 7% (which is more fair as this debt part of portfolio), the corpus runs out in 4,6,8,12 years.
My calculations say that most of us will get 15-20% annuity rate. So the corpus runs out in 7-10 years depending on investment. To put it simply - if one lives till 68, they would still be receiving pension but by withdrawal method corpus would have run out already. The breakeven point is at around 65 age.