Find out how much your EPS pension will increase with this Excel calculator if you contribute 8.33% of your full salary (basic +DA) instead of Rs. 1250 per month which is 8.33% of Rs. 15,000 the current salary ceiling mandated by the EPFO. Last week, a 1200% hike in pension for Mr. Praveen Kohli following an October 2016 Supreme court judgement raised eyebrows. When I suggested not to increase EPS Contributions for higher Pension as it may mess up your retirement, many readers promptly ignored it and wanted to know if they are eligible for the pension increase and how much would their revised EPS pension be.
Although I do not recommend it, I am happy to provide details about revised EPS pension. First of all, you need to be a member of the EPS to be eligible for a revised pension. This means that if you are retired and only contributed up to Rs. 1250 per month in the EPS, it is unlikely that will be going to get a revised pension. Simply because you are not eligible for it as you are no longer a part of EPS and there is no employer involved.
What is the proof? This EPFO circular makes it quite clear that if you did not contribute more than Rs. 1250 a month, there is no question of getting a revised EPS pension. This may be an interim decision, but please recognise even if allowed, you will have to pay a substantial sum to the EPFO to get this pension. It may be a good deal for you, but it is a terrible deal for them. Precisely the reason, they are unlikely to allow.
Second of all, if you are in service, and if your salary is above Rs. 15,000 (I would be surprised if anyone with a lower salary reads this!), then you will have to submit an application via your employer to the EPFPO to deduct a sum equal to 8.33% of your basic +DA towards the EPS. The above circular enables this provision.
How much EPS Pension will I get? The rules
To keep things simple, we will assume that you joined service after 15th Nov. 1995. The pension is calculation is different for older employees (See Bemoneyaware link below).
EPS Pension = (Pensionable annual Salary X Number of Years Service)/70
Pensionable annual salary = average of last 5 years contribution to EPS. This is the key differentiator. Under the old rules, this could not be higher than Rs. 15,000 per year after 1st Sep 2014 and Rs. 6500 per year before that.
Now, if you contribute 8.33% of your actual basic+DA, then will be used in the revised EPS pension calculation. See examples below.
The number of Years Service = 10 (minimum eligibility of EPS pension) to maximum 35 years of service. If the service is 20 years or more, 2 years will be added as a bonus.
If the no of years of service is less than 10, you can withdraw the EPS amount. Now does that give you ideas if you increase EPS contributions? 🙂 Of course, if you withdraw, then past service will not be carried forward.
Example with ceiling salary for EPS contribution
Suppose a person works for 20 years and retires on 1st Sep. 2015 (to make calculations simple).
Pensionable salary = average of last 60 months ceiling salary as applicable.
In the last 12 months before retirement this is 15,000 (1250 a month) and before that it is Rs. 6500 (542 a month)
So we have pensionable monthly salary = [(48 x 542) + (12 x 1250)]/60 = Rs. 684
Pensionable annual salary ~ Rs. 8203 (12 times 684)
EPS Pension = 8203 x (20+2)/70 ~ Rs. 2578
Example with and without ceiling salary for EPS contribution
Now consider a person retiring on 1st Sep. 2019 after 20 years of service. She applies for enhanced pension and it is set in force from Sep. 2017
From Sep 2013 to Aug 2014: EPS contribution is Rs. 542 a month
From Sep. 2014 to Aug 2017: EPS contribution is Rs. 1250 a month
From Sep 2017 to Aug 2018: EPS contribution is 8.33% of 50,000 (which is her basic +DA, say) = 4165
Pensionable salary =[ (12 x 542) + (36 x 1250) + (12 x 4165)]/60 ~ 1692 (monthly)
Pensionable annual salary = 20,304
Revised EPS pension = 20304 x 22/70 ~ 6382
If the EPS contribution was not increased EPS pension would have been Rs. 4183.
Thus by increasing the EPS contribution to 8.33% of full salary, the monthly pension has increased by about 53%.
Hang on. A sum of 34,980 was “contributed” to the EPS for this higher pension. Is it worth it? In this case, yes the higher contribution was only for one year. So it does not make much of a difference one way or another.
The EPS has to pay an annuity of 6.29% from the 34,980 as extra 2199 pension. That is not a terrible deal for them.
In this case, the extra contribution to EPS was paid only over a year. So there is no time value of money involved. That is, She could not have got much benefits had the money remained in EPF and not shifted to EPS.
You can use the calculator linked below to estimate your EPS pension in this method. This is for those retiring in the near future.
Here is a screenshot
Projections with and without ceiling salary for EPS contribution
Now let us consider a projection from the first year of employment. This is important because only last 5Y contributions to EPS is used for pension calculation, but the contributions are made from the first year of service. This means that if you are going to retire in the next few years, you can get the benefit of higher EPS pension without losing much to EPS. Please correct me if this understanding is incorrect.
Now consider a person starting with an annual salary of 6 Lakh (basic + DA alone)
The rate at which salary (basic + DA alone) will increase each year = 5%
Years in service = 20
If the EPS contribution was fixed at 15,000 a year, the total contribution over 20 years = 3 Lakh
If the EPS contribution was 8.33% of full basic + da for all those 20 years, the total contribution to EPS = 16.52 Lakh.
The monthly EPS pension at 15,000 celing = 4,714.
The monthly EPS pension at full salary deduction = 36,089
Now had you not invested that mony in EPS and it was left in EPF and if we assume an interest rate of 8% return (you can change these numbers in the calculator), then upon retirement, you will get 28.70 Lakh. This is only the employers contribution. Your contribution is separate and not part of this illustration.
If you are going to take this 28.70 lakh and buy yourself an annuity from a life insurer at 6% rate, you will only get a pension of 14,354. This is only 40% of the EPS pension.
So if your aim is to take the EPF contribution (at least the employers contribution alone) and buy an annuity from it, then enhancing EPS contribution to get the revised EPS pension sound much, much better.
Even if the EPS pension reduced to 50% upon the death of the pensioner, it will still be approximately equal to the annuity pension. The only downside is the annuity pension is returnable (for a lower annuity rate) and this is not possible with EPS.
My guess is that if there are too many requests for enhances EPS pension, the EPFO will go bankrupt.
Hang on, the illustration is not over.
Why would you want to buy an annuity? If you took that 28.70 lakh and invested it in a portfolio offering 10% after tax (not impossible, you can change this in the calculation) and withdrew from it an amount equal to the enhanced EPS pension increasing at 8% a year (inflation), you will be able to provide an inflation-protected income for about 7 years in retirement (remember this is only from the employers contribution, Your contribution corpus + other invests you make remain outside this calculation.).
On the other hand, if you received that enhanced EPS pension, the 8% inflation (you can change it as desired in the calculator) will reduce the purchasing power of this pension by 50% in 8.3 years. The duration for the enhanced withdrawal is almost the same as the duration over which the constant pension drops in value by 50%.
I will leave it to you to interpret these numbers. Most of you will not agree with me but that instead of a constant pension that decreases in value each year, I will opt for more money in hand to invest the way I want. This gives me a better ability to handle inflation and other emergencies.
This love for pension should remind of this: Why have we not seen a retirement crisis in India? and
Should I opt for Revised EPS Pension?
If you have enough corpus other than this 28.7 lakh to combat inflation and prefer to get a higher pension from EPS pension, then go ahead. The only trouble, you will be paying more tax.
If you do not have enough corpus from other sources and cannot combat inflation anyway, then again get a higher pension from EPS.
There is a middle region between the two choices where this EPF corpus could make a difference to how well you manage inflation in retirement. For them at least, the enhanced EPS pension does not make sense. My advice is to not get overexcited at the prospect of higher EPS pension. Look at both sides of the picture. Download this free robo advisory template, punch in your numbers and then decide how robust your retirement is.
Screenshots of EPS Pension Calculator in Excel
Update on higher EPS Pension
References & Credits
1: Kirti’s fantastic guide to EPS pension calculation at Bemoneyaware
2: Insightful discussions with Ashal Jauhari (FB Group Asan Ideas for Wealth, admin), Chandan SIngh Paidyar (fee-only planner) and Kapil Tiwari
Note: I am an NPS investor and could be wrong in my interpretation. Please check the numbers thoroughly before using. Do let me know asap if any correction is necessary.
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