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Thursday, February 12, 2015

Working in private sector? Your pension (EPS) is getting accumulated..

In a recent survey by a leading financial magazine, it came out that almost 60% of the respondents were unaware that private-sector employees covered by the employee Provident Fund (EPF), are also eligible for lifelong pension. More than 30% of these unaware respondents had already contributed Rs. 65,000-1 lakh of their hard earned money to the Employees' Pension Scheme (EPS) till now. Want to understand about this EPS pension scheme?...read on...

Employees’ Pension Scheme (EPS) 
'Provident' word in English dictionary means "timely preparation for the future". There are so many provident funds being talked about that I myself get confused when people used to ask me about Employee Provident Fund and Pension and Gratuity and Superannuation. Here, we are going to get a deeper understanding of the EPS (Employee Pension Scheme)
What is Employees’ Pension Scheme (EPS)
If you are a working professional, then 12% contribution from your side (12% of your basic salary) goes to your Employee Provident Fund (EPF), but the 12% contribution which your employer makes does not go fully into your EPF account.

Out of the employer's total contribution, a small 8.33% actually goes in Employees’ Pension Scheme (EPS) (subject to a maximum of Rs 1250) and the rest goes into EPF. Please note that vide notification dated 22.08.2014, Ministry of Labour and Employment has increased  Employee Provident Fund (EPF) from Rs. 541 ceiling to Rs. 1250 ceiling.

But there is much more to Employee Pension Scheme such as how much pension can one get? Does EPS portion earn any interest? When can you withdraw and how much amount etc? We must understand all these in more detail to take more informed decisions in life.
Main features of EPS
Employees’ Pension Scheme (EPS) of 1995 offers pension on disablement, widow pension, and pension for nominees. EPS program replaced the Family Pension Scheme (FPS) of 1971. When an employee joins an establishment covered under the Employees Provident Funds & Miscellaneous Provision Act, 1952 (s)he becomes a member of Employees Provident Fund Scheme (EPF) as well as Employees’ Pension Scheme (EPS) 1995.
  • EPS fund is financed by diverting 8.33% of employer’s monthly contribution from the EPF. 
  • Monthly contribution to EPS is restricted to 8.33% of Rs. 15000/- or Rs 1250 p.m. 
  • Unlike the EPF contribution, EPS part (8.33% out of 12% contribution from your employer or Rs 1250 pm what ever is minimum) does NOT get any interest.
  • The fraction of service for six months or more shall be treated as one year and the service less than six months shall be ignored. So 9 years and 6 months will be rounded up to 10 years.
  • Lifelong pension is available to the member and upon his death members of the family are entitled for the pension.
  • An employee can start receiving the pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58 or 50 years (50 years pension being termed as Early pension).
  • No pension is payable before the age of 50 years.
  • Early pension can be claimed after 50 years but before the age of 58 years. But it is subject to discounting factors for every year falling short of 58 years. In case of death / disablement, the above restrictions don’t apply.
  • The maximum Pension per month is subject to maximum of Rs 7,500 per month.
  •  Maximum service for the calculation of service is 35 years.
  •  No pensioner can receive more than one EPF Pension.


When can an employee start receiving a Pension?
An employee can start receiving the pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58 or 50 years. However, no pension is payable before the age of 50 years and early pension after 50 years but before the age of 58 years is subject to discounting factor for every year falling short of 58 years. In case of death / disablement, the above restrictions doesn't apply.


What happens between 50 and 58 years?
You can opt for pension after 50 but will have to forgo 4% for every year before you turn 58.
What is the formula for calculating the monthly pension?
Under Employees’ Pension Scheme, the monthly retiring pension is decided on the basis of ‘Pensionable Service’ and ‘Pensionable Salary’ and is worked out as follows:

Monthly pension = ( Pensionable salary*Pensionable service)/70

Pensionable Salary is arrived as the average of 60 months last drawn salary instead of earlier rule of last 12 months average salary. If someone is going to retire after 3 years with Rs. 15,000/- pensionable salary, and was working with Rs. 6,500/- pensionable salary earlier, then the pensionable salary calculation would be : 
(Rs. 15,000*3 + Rs. 6,500*2 )/5 = Rs. 11,600/- 

Pensionable Service is the service in years rendered by the member for which contributions have been received. Maximum service cannot exceed 35 years.


What is the maximum amount of Pension available under EPS?
Based on a maximum employment period of 35 years, and maximum contribution of Rs 15000, the maximum amount of pension as per the Pension formula would be = 15000 * 35/70 = Rs 7,500 per month or  Rs. 90,000(7500 * 12) per year.


Is the Monthly Pension paid under EPS justified?
The amount of pension is meager. If one would have invested Rs 1250 pm in a recurring deposit at the rate of 8% for 35 years, one would get 12,49,263/- as maturity amount. If this maturity amount is put in buying the Pension plan, say LIC’s Jeevan Akshay VI and put the above amount Rs 26,61,361/- in the premium calculator of LIC with option as Annuity payable for life, one would get monthly pension of approx Rs 25,000 pm which is much more than Rs 7,500 pm.


What Happens if you resign before completing 10 years of service?
If you resign before completing 9 years and 6 months of service, you get the “withdrawal benefit” which depends on your monthly salary and the no. of years of service. EPS always rounds up the number of years. So, if you worked for 4 years and 7 months, you will be considered as 5 years. 
You can opt for the withdrawal option only if you are less than 50 years old.

No. of Years of Service Multiplication Factor
1                                 1.02
2                                 1.99
3                                 2.98
4                                 3.99
5                                 5.02
6                                 6.07
7                                 7.13
8                                 8.22
9                                9.33
Note: The amount you will receive is not based on the balance in your EPS corpus. It is based on your basic salary and no. of years of service that can be considered after rounding up as per the table above.
For Ex: An employee exits from employment after 3 years and 8 months of service with a basic salary on exit Rs. 5,000 - then they will get Rs. 19,250 (5000 * 3.99)

If you have crossed the 50 year mark or the 10 years of service then this withdrawal option is not available for you. 
Are EPF and EPS linked?
Technically, EPS and EPF are not linked . You can withdraw the EPF once you leave the organization after filling Form 19. In case of EPS, if the service period is less than 10 years, you’ve option to either withdraw your corpus or get it transferred by obtaining a ‘Scheme Certificate’. Once, the service period crosses 10 years, the withdrawal option ceases .For pension, withdrawal benefit, scheme certificate etc. application should be through ex-employer. For pension, Form 10D(pdf format) is to be used. For withdrawal benefit & scheme certificate, fill Form 10 C



Does EPS get transferred with EPF?
Yes, both EPS and EPF get transferred together by filling in Form 13. You can fill it online here (http://memberclaims.epfoservices.in/request_account_transfer.php). Both the accounts may be separate but the custodian of EPS and EPF fund is a single organisation, which is EPFO. In fact, if you download your latest passbook from EPFO website (http://memberclaims.epfoservices.in/request_account_transfer.php), you will see a single statement with three different columns - one for EPF your contribution, 2nd for EPF employee contribution and 3rd for pension.

Summary
In nutshell, being aware of what your EPS corpus is, and how is it growing, you can have better planning of your financial freedom. However, looking at the meager returns, it is no way to be relied for your post freedom income.
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Cheers

Manoj Arora
Freedom can buy you.... what money cannot !!

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