Should you opt for new EPFO pension scheme?

If you work in the private sector, you can now opt for a higher pension. Earlier, the pension you got was capped on a basic salary of Rs 15,000 a month. Now, it is possible to link it to your actual basic. On November 11 last year, the Supreme Court asked the government to give employees this option. Then, on February 20, the government came out with a circular that said employees who want to avail of a higher pension will have to opt in by March 3, 2023. But there are still many questions that require clarification – and the government has said it will come up with one more circular that will hopefully explain the nitty-gritty. Swati Mathur explains what we know so far about the new pension scheme, and where clarity is neededMedium108406244 What’s Changing? ➤ The Employee Pension Scheme (EPS) 1995 was introduced in place of the Family Pension Scheme. Under EPS, members are entitled to a pension for their lifetime after retirement. In case of death during service or after, a reduced pension is paid to dependents. Since EPS was framed within the provisions of the Employees Provident Fund Act, all employees covered under the Employees’ Provident Fund (EPF) were also covered under EPS. But there was a catch. EPS covered only those employees whose Basic/DA was up to Rs 15,000 a month or who had been a member of EPS as on September 1, 2014, irrespective of any salary limit.➤ The EPS member makes no contribution towards EPS. Only the employer contributes 8.33% of the member’s basic to EPS, out of its total 12% contribution. However, since pensionable salary is capped at Rs 15,000 a month since September 2014 for all EPS members, the 8.33% EPS contribution also remains capped and does not exceed Rs 1,250 per month. So, the entire 12% of the employer’s contribution over and above Rs 1,250 per month goes to the member’s EPF.Medium108406246 Now this cap is gone. So, you can get a pension linked to your actual basic. How Much Pension Will You Get? ➤ It will be: (The average of your monthly basic for the last 60 months of service X years under EPS)/ 70 Who Is Eligible To Apply? ➤ All employees who have been contributing towards the Employees’ Provident Fund on full basic salary.➤ Employees who had contributed to EPS and did not exercise the joint option for higher pension on actual salary prior to September 1, 2014, can now apply for enhanced pension. The employees and pensioners should give joint consent with the employer to the EPFO for adjustment from Provident Fund to Pension Fund and for any re-deposit to the fund.➤ The last date for exercising the joint option is March 3, 2023, which is the deadline set by the Supreme Court.Medium108406247 What Happens Now? ➤ Employees who exercise this option will get a chance to contribute up to 8.33% of their actual basic salaries, instead of 8.33% of pensionable salary capped at Rs 15,000 a month, towards pension. What’s Good About That? ➤ The main advantage of opting for a higher pension is that it allows you to build a pension corpus, an assured income to dip into post-retirement. This is especially beneficial if you need a regular income, tend to spend excessively, and have trouble saving.➤ If someone joins EPS young, the pension amount can be reasonable, else the amount will likely be small. What’s Not So Good? ➤ For one, the money you have in PF, which is tax-free (subject to certain restrictions), will come down. Your entire PF corpus passes on to your spouse and children or nominee after your death. In case of pension, your spouse will likely get only 50% of your pension. If someone dies early that would amount to a serious financial loss.Medium108406248 1 Under EPS95, subscriber contributions capped at Rs 15,000 attracted an additional contribution of 1.16% by the government. With the Rs 15,000 cap being lifted and actual salaries becoming the reference point for calculation of pension, it appears unlikely that the government will contribute an additional 1.16% on a member’s EPS contribution with retrospective effect from September 1, 2014. 2 This may effectively mean that the additional contribution of 1.16% with retrospective effect will have to be paid by EPFO members. It also remains unclear whether the government will contribute additionally at all for those who exercise the joint option on higher pension. 3 Under EPS95, the employee’s next of kin would get 50% of the pension in the event of the member’s death. The terms of reference of maturity have still not been clarified by the government for the revised scheme.Medium108406250 4 Typically, when an employee changes jobs and chooses to withdraw her EPFO contribution (if tenure of work is over 5 years), pension contribution is not withdrawn. It is unclear if the final calculation of pension in EPS will consider pension accrued from the start of gainful employment or only from the last service. 5 EPFO is also yet to provide clarity on what happens to someone who retired, for instance, in 2013 and signed up for a monthly pension through form 10D. What must such an EPS subscriber do to keep her revised pension active? 6 Will the pension be linked to inflation? There’s no word on that yet, but sources in the EPFO indicated that it’s unlikely to be the case, which means the real value of your pension would shrink over time.