I am about to retire, can I opt for a higher EPS pension?

A reader says, “I’m 57 and on the verge of retirement and in IT, can I opt for a higher EPS pension?”

As regular readers may be aware, we have discussed this topic at some length:

• Higher EPS Pension: Should those who retired recently or are about to retire opt for it?
• Can I opt for a higher EPS pension? I retire in 2046
• Are you really eligible for a higher EPS pension? EPFO circular clarifies

Although we covered the reader’s question just a few days ago, it may not be a bad idea to discuss it again. The reason is, the discussions we have had with friends at Fee-only India, a message from a Twitter follower and this interview with KK Jalan, Former Central EPFO Commissioner.

Mr Jalan says, “The para five of the (Feb 20th) circular very clearly says that only those people who were contributing at a higher rate to the Employees’ Provident Fund in 2014 are eligible. Secondly, those employees who did not or forgot to exercise the option are the only employees who can now exercise the option. The number of such employees may not be very high because not many employees were paying at a higher amount under section 26(6) of the EPF scheme who forgot to exercise the option. The employees which will satisfy all the conditions one, two and three will not be very high. A rough estimate of the number would be around one lakh“.

This is quite interesting. He believes that only about one lakh EPFO subscribers who retired after Sep 2014 or are still in service are eligible for higher EPS pension. This seems like a very low number. Surely much more subscribers would be eligible?!

A Twitter follower said his wife had always contributed 12% of her salary to the EPF. The employer had also contributed 12% of her salary until 2018 and then changed to the basic contribution. She approached her HR for higher pension eligibility. When her HR spoke to an EPF inspector, they were informed that the employee was not eligible for a higher pension!

There is still a lot of confusion and uncertainty in the matter and how the EPFO decides to interpret the supreme court verdict.

Three conditions must be simultaneously met.

(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”.

What does “contributed under paragraph 26(6) of EPF Scheme on salary exceeding the prevalent wage ceiling of Rs 5000/- or 6500/-” mean? Does it mean a contribution of 12% of salary to EPF (employee contribution alone) or 12% of salary by both employer and employee with 8.33% of employer contribution to EPS?

Most people argue it is only 12% of the salary for the employee contribution. However, this would mean lakhs and lakhs of people would be eligible, and the EPFO cannot bear the pension cost as the annuity rate on a lump sum payment is too high.

Does the EPFO expect a 12% of salary contribution by both employer and employee to be eligible for a higher EPS pension? The supreme court order does not mention this, but this is the only way the eligible number would drop close to what Mr Jalan mentioned.

Please note: we only ask questions here. We do not offer opinions other than more clarity is required on the eligibility and the actual pension calculation, as mentioned in earlier articles.

The calculation may be simple for a PSU employee who has worked in the same organisation and is “eligible” for a higher EPS pension. It will be a lot tougher for a corporate employee who has changed jobs even once and whose salary fluctuates.

Then there is the question of the higher pension itself. If we look at some unofficial illustrations circulated among staff and compute the annuity rate = extra annual EPS pension divided by lump sum paid from EPF to EPS, the rate seems to be in double digits. Such high payouts are unsustainable by an already bankrupt EPFO.

Please note: The annuity rate argument is only valid for those who have retired or are about to retire. Others with several years of service left will also have to contribute each month, so the time value of money will lower the rate.

The high rate seems too good to be true. Either only a small section of employees are eligible for this or there is another twist in the plot. All eyes on the EPFO “notice board”.

We have already recommended what those about to retire and (truly) eligible for a higher pension should do – Higher EPS Pension: Should those who retired recently or are about to retire opt for it? – by looking at the initial withdrawal rate of the corpus in retirement.

Our most important recommendation is: do not go by what you see circulated in social media or among employee groups. Wait for clarity from the EPFO and nudge your HR to confirm this with the EPFO office for different permutations and combinations.

Finally, a higher pension alone is not enough for financial independence in retirement. See: Is a pension of 50% of the last drawn pay enough for retirement?