Don't bank just on EPS as its pension payouts are paltry, say analysts

The Employees’ Provident Fund Organisation (EPFO) is planning to bring out a new pension product for organised sector workers who get basic wages of more than Rs 15,000 per month and are not mandatorily covered under its Employees’ Pension Scheme 1995 (EPS-95), according to media reports.

At present, it is mandatory for employees who earn a basic salary plus dearness allowance (DA) of up to Rs 15,000 to enrol in EPS. The key drawback of the current scheme, and the reason a new scheme is being formulated, is that the pension is paltry. 

Current scheme

The employee and the employer each contribute 12 per cent of the employee’s basic salary and DA to EPF. Prashant Singh, vice-president and business head – compliance and payroll outsourcing, TeamLease Services, says: “While the employee’s entire contribution goes to EPF, 8.33 per cent of the employer’s share goes to EPS.”

The formula for calculating the monthly pension from EPS is as follows: (Pensionable salary x number of years contribution to EPS)/70.

If a person’s monthly wage is Rs 15,000 and he has worked for 30 years, he will receive a monthly pension of (15,000 X 30)/70=Rs 6,428.

Benefits vary

On retirement: Number of years served is important. Utsav Trivedi, partner, TAS Law, says, “If the employee is covered by the Act, then the employee receives a monthly pension from the age of 58, provided he has rendered service for a minimum 10 years.”

Less than 10 years’ service: If a person has not completed 10 years of service before attaining the age of 58, he can withdraw the complete sum on turning 58.

Disability: EPFO members who become permanently or totally disabled are eligible for a pension even if they don’t complete the mandatory service period. 

Archit Gupta, chief executive officer (CEO), Clear, says, “The employer must, however, have deposited funds for at least one month in the employee’s EPS account.”

Pension to family: In certain scenarios, the employee’s family receives the pension. Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, says, “The family gets a pension in case of an employee’s death while in the employer’s service, provided the employer has deposited funds in his EPS account for at least one month; in case the employee has completed 10 years of service but dies before 58; or in case the employee dies after he started receiving the pension.”

Singh says, “After that, the children receive the pension till the age of 25. A physically challenged child receives a pension for his entire lifetime.”

Nuances of withdrawal

If you are below 58 on the date of exit, you can opt for a scheme certificate under EPS instead of a lump sum withdrawal. Gupta says, “The scheme certificate allows you to retain EPFO membership in case you plan to join another job.” The scheme certificate is given after 10 years of service which, however, need not be continuous. Gupta says, “If you hold a scheme certificate with service of 10 years or more, you get a monthly pension from the age of 58. You can also apply for an early pension at age 50.”

You can apply for complete withdrawal from EPF and EPS if you lose your job and are unemployed for two months or more, provided your number of years of service (in EPS) is less than 10.

Don’t rely on EPS alone 

EPS is a government, guaranteed return scheme, with zero investment risk. The pension from EPS is usually small and, hence, inadequate. Trivedi says, “It is also static and not linked to a price index.” Inflation erodes the value of the pension over time.  Balwant Jain, a Mumbai-based advisor, says, “The pension from EPS alone will not suffice. Invest in a mix of diversified mutual funds and public provident fund (PPF) as well.”