Your eligibility is the first aspect to consider when discussing higher EPS pension. It is not open to everyone who retired after Sep 2014 or are still in service. See: Are you really eligible for higher EPS pension? EPFO circular clarifies (also see below).
Once you have convinced yourself that you are eligible (see conditions below), three employee categories can be considered.
- Those who retired before Sep 2014,
- Those who retired after Sep 2014 (but up to Feb 2023)
- Those who are going to retire in future (10Y or more)
We have already covered category 4: Can I opt for higher EPS pension? I retire in 2046 and shall discuss category 2 in this article. Ps. I earlier thought there were four categories, but three is sufficient.
Let us first go over the three conditions that must be simultaneously met for eligibility.
i. The employees and employers who had contributed under paragraph 26(6) of EPF Scheme on salary exceeding the prevalent wage ceiling of Rs 5000/- or 6500/-; and
ii. did not exercise joint option under the proviso to Para 11(3) of the pre- amendment scheme (since deleted) while being members of EPS,95; and
iii. were members prior to 01.09.2014 and continued to be a member on or after 01.09.2014.”
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Note: If you had not contributed higher the wage ceiling limit in the past in EPF or EPS, then you are not eligible for higher pension now!
Historical EPF wage ceiling
- ₹300 in 1952
- ₹500 in 1957
- ₹1,000 in 1962
- ₹1,600 in 1976
- ₹2,500 in 1985
- ₹3,500 in 1990
- ₹5,000 in 1994
- ₹6,500 in 2001 and
- ₹15,000 since 2014 onwards.
Someone who retired after Sep 2014 should have contributed a sum higher than wage ceilings of Rs 5000 and Rs. 6500 to EPF/EPS to qualify for higher EPS pension.
So now let us consider an employee who retired after Sep 2014. If they already contributed more to EPS, opting for proportionately higher EPS pension is obviously the right call.
How about cases where employees contributed 12% of salary in EPF, but the EPS contribution was only 12% of wage ceiling. Thanks to Ashal Jauhari and SEBI RIAs Chandan Singh Padiyar, Ajya Pruthi and Swapnil Kendhe for helpful discussions.
The shortfall in EPS contributions must be deducted from EPF with interest. But is it worth it?
For these cases, you will have to determine your withdrawal rate. This is usually defined as total expenses in the first year of retirement divided by total corpus. But for our purposes it would be more meaningful to define this differently.
Withdrawal Rate (WR) = Current annual withdrawal amount divided by the current total corpus (excluding an emergency corpus).
This is because pension from other sources or rental income can be used by the retiree to handle a good chunk of annual expense, and the withdrawal amount only accounts for the shortfall in expenses.
Let say the WR is 5.9% in 2023, and year of retirement is 2015. Assuming an inflation of about 5% or 6%, we can approximate the WR in the year of retirement. That is the initial withdrawal rate.
To do this, we use: initial WR is 5.9%/(1+5%)^8 = 4%
Here 8 = time elapsed in years since retirement: 2023-2015.
We will also consider the annuity rate of EPS pension (applicable only in cases where a lump sum is deducted from EPF to account for EPS shortfall).
Annuity rate = Annual extra EPS pension divided by lump sum paid from EPF.
If the initial WR is > 4%, then this probably means you are withdrawing too much from your current corpus to meet the shortfall in expenses after accounting for pension or rental income.
Suppose the annuity rate of EPS pension is higher than the 30Y or 40Y RBI bond coupon rate. In that case, you can consider paying the shortfall in EPS contributions to get higher EPS pension but without completely emptying your liquid corpus (excluding an emergency fund).
If the initial WR is < 3.5%, you probably have ample liquid retirement assets to handle inflation and emergencies. Therfore, you do not need the higher EPS pension and can opt out.
If the initial WR is between 3.5% to 4%, it is a cat on the wall situation. Closer examination and projection of future cashflow with reasonable assumptions and expectations are necessary to decide whether one should opt for higher EPS pension. It maybe possible to manage without the EPS pension, but there is chance of running out of money in your lifetime. You can DIY this cashflow projection or consult a SEBI registered fee-only advisor from our curated list.
Those with ample funds can use the EPS pension as a secondary pension source if it has a higher annuity rate. You can simulate this with our robo advisory tool.
As I am sure you have realised by now, it is a rather tough choice, and each case is different. So general calculations or comparison will not help. Now that the last date has been extended to May 3rd, there is plenty of time to consider individual circumstances.