Higher EPS pension calculation: Know the extra amount you need to pay, returns you will get; should you go for it?

The Employees’ Provident Fund Organisation (EPFO) has come out with clarifications for many doubts regarding computation of the shortfall in contribution and accrued interest for those opting for the higher pension scheme. The provident fund body has notified the replacement mechanism for 1.16% additional contribution that the members were required to pay on a wage above Rs 15,000 when opting for the higher EPS pension; it will now be added to the employer’s contribution towards EPS, taking it to 9.49%. It will help employees analyse their additional contribution and the return they can expect on it. Now, the next question is whether you should go in for the higher pension scheme or not. Impact of new rule regarding 1.16% extra contribution

Employees opting for the higher pension will not have to pay the additional 1.16% contribution on salary above Rs 15,000 from their salary; it will come from the employer’s overall contribution of 12% towards EPS and EPF. This is because the employer’s contribution towards EPS has been kept at 8.33% for salary up to the current wage ceiling of Rs 15,000 but the contribution towards EPS by the employer has been raised from 8.33% to 9.49% on salary above the wage ceiling of Rs 15,000. This rule will be applicable not only on future contributions but also on the contributions required to make up for the shortfall (since September 1, 2014) for employees applying for the higher pension now. A member will be required to pay not only the missing contribution at a higher rate of 8.33% and 9.49% on salary up to Rs 15,000 and above Rs 15,000, respectively, but will also have to pay the accrued interest amount till date at the applicable historical EPF interest rate.

For service period before September 1, 2014, the revised maximum employer’s contribution will be calculated at 8.33% of the actual wage to find out the missing contribution of past and accrued interest.

This missing dues for EPS contribution with interest can be either transferred from the EPF account if it has sufficient balance or in case of a shortfall the balance amount will have to be deposited from the member’s bank account.

Therefore, the sole important factor that will tell you whether you should go for the higher pension or not is the return on your additional amount that you need to deposit for getting the higher pension.

When you retire after 35 years under EPS 95

*Including additional contribution toward EPS in past (9.49% towards EPS on wage above Rs 15000 since Sept 1, 2014) and future together with interest till retirement, historical annual interest rate till FY22 taken from EPFO; Assumptions: Future interest since FY23 to retirement is 8%, starting with a monthly basic salary of Rs 5000 on April 1, 1996 which grows annually at 7.5%, EPS contribution remains uninterrupted during consideration period

People who retired after August 2014 or close to retirement will gain most
The pension amount under EPS 95 depends primarily on two factors: length of service and average salary of the past 5 years. Had the contribution rate been similar throughout the service period, it would not have made much difference when you joined and when you will retire. However, as the contribution rate went up since September 1, 2014, members will have to contribute at a higher rate for the same pension.

Therefore, the most critical part that pushes your ROI higher or brings it down is your length of service falling under additional contribution period starting from September 1, 2014. The lower your service period after September 1, 2014, the higher will be your return on the additional amount that you pay for higher pension. So, people who retired after August 2014 or are close to retirement are better off in terms of higher return as their length of service will be higher in the period they are not required to contribute additional 1.16%.

When you retire after 30 years under EPS 95

Why higher EPS will deliver good return for most
The retirement age under EPS is currently 58 years. The global average life expectancy is around 73 years. The life expectancy in India is reaching close to 70 years and has been rising gradually. So, if we consider 15 years of post-retirement life, then most members will have a service period of 20 years or above. They will get a very good IRR of 8% or above on the future value of all additional contributions, at the time of retirement. This is the lowest assured return you are expected to get 10 years from now. As the growth of the country slows, interest rates will start coming down gradually. In such a scenario, 8% or more assured return for life is worth going in for.

With medical facilities improving, many people are expected to live longer. The longer you live, the higher will be your return on the additional contribution.

The higher EPS pension will be highly advantageous for people who have seen a steep salary rise closer to retirement. The higher your last 5 years’ basic salary, the bigger will be your pension and the higher will be your return on additional contribution.

When you retire after 25 years under EPS 95

Who can consider giving higher EPS pension a miss?
People whose total length of service with active EPS contribution is less than 20 years are likely to get only a moderate return on their corpus. This is primarily because you get a bonus of 2 years added to the length of service if your eligible service period is 20 years or more. This pushes up your pension amount. But it doesn’t happen if your service length is less than 20 years. On top of this, if a major part of your service period falls after 2014, the attractiveness of the higher EPS comes down. You may have many alternatives like deploying your funds in equity and going for much higher return over a long period.

When you retire after 20 years under EPS 95