Should I opt for higher EPS pension by contributing a lump sum?

After the recent supreme court ruling on the Employee Pension Scheme (EPS), EPFO subscribers, as of 1st Sep 2014, can retrospectively contribute 8.33% of their basic + DA to the EPS via a deduction from the EPF.

The option to do this has been opened only to a section of employees and is expected to be expanded soon. In this article, we shall not get into the nitty-gritty of the judgement or eligibility criterion.

Instead, we shall focus on what eligible employees should do. Before we begin, it is important to point out that this option is not eligible to those who joined the EPF after 1st Sep. 2014 as they are not part of the EPS.

• A substantial sum of several lakhs needs to be paid from the EPF to the EPS to avail higher pension. This will interrupt the compounding of the EPF corpus for those who still have a few years of service left.
• Suppose you pay the lump sum and opt for a higher EPS pension, estimate what it would be at the time of retirement.
• Instead, if you let that money compound in EPF and use it to purchase a govt bond via RBI Retail Direct upon retirement, how much would be the interest payout? For example, I used RBI Retail Direct to buy government bonds and create an income source.
• Suppose the RBI bond payout is not much different from the EPS pension. In that case, the RBI bond is the superior option because the bonds can be held jointly with your spouse in either or survivor mode, and the same interest payout will continue for the lifetime of both holders, and the money will go to heirs.
• Contrast this with the EPS pension, where the corpus cannot be recovered; worse, the payout to the surviving spouse will drop by 50% upon the subscriber’s demise.
• Not opting for the enhanced EPS pension has another advantage. There is extra liquidity to opt for a pension at a later age. Insurance annuity payouts after 70 are often more lucrative than government bond coupon rates. See: I need a pension: Should I buy an annuity or a govt bond?

Our opinion is for those in the highest tax slab, not opting for the enhanced EPS pension is more beneficial. There is a higher corpus to work with to combat inflation via a bucket strategy, and even if one wants fixed income/pension, government bonds are more advantageous.

The higher EPS pension option could possibly benefit those in lower tax slabs, but this will have to be decided on a case-by-case basis, depending on the individual’s circumstances. At the very least, we urge readers not to be in a hurry to opt for the higher EPS pension and compare the abovementioned scenarios.