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Wednesday, March 1, 2023

Ought to those that retired not too long ago or about to retire go for it?


Your eligibility is the primary facet to think about when discussing greater EPS pension. It isn’t open to everybody who retired after Sep 2014 or are nonetheless in service. See: Are you actually eligible for greater EPS pension? EPFO round clarifies (additionally see beneath).

After you have satisfied your self that you just are eligible (see situations beneath), three worker classes may be thought of.

  1. Those that retired earlier than Sep 2014,
  2. Those that retired after Sep 2014 (however as much as Feb 2023)
  3. Those that are going to retire in future (10Y or extra)

We’ve got already coated class 4: Can I go for greater EPS pension? I retire in 2046 and shall focus on class 2 on this article. Ps. I earlier thought there have been 4 classes, however three is enough.

Allow us to first go over the three situations that have to be concurrently met for eligibility.

i. The staff and employers who had contributed beneath paragraph 26(6) of EPF Scheme on wage exceeding the prevalent wage ceiling of Rs 5000/- or 6500/-; and
ii. didn’t train joint possibility beneath the proviso to Para 11(3) of the pre- modification scheme (since deleted) whereas being members of EPS,95; and
iii. had been members previous to 01.09.2014 and continued to be a member on or after 01.09.2014.”

Word: For those who had not contributed greater the wage ceiling restrict up to now in EPF or EPS, then you aren’t eligible for greater pension now!

Historic EPF wage ceiling

  • ₹300 in 1952
  • ₹500 in 1957
  • ₹1,000 in 1962
  • ₹1,600 in 1976
  • ₹2,500 in 1985
  • ₹3,500 in 1990
  • ₹5,000 in 1994
  • ₹6,500 in 2001 and
  • ₹15,000 since 2014 onwards.

Somebody who retired after Sep 2014 ought to have contributed a sum greater than wage ceilings of Rs 5000 and Rs. 6500 to EPF/EPS to qualify for greater EPS pension.

So now allow us to think about an worker who retired after Sep 2014. In the event that they already contributed extra to EPS, choosing proportionately greater EPS pension is clearly the proper name.

How about circumstances the place workers contributed 12% of wage in EPF, however the EPS contribution was solely 12% of wage ceiling. Because of Ashal Jauhari and SEBI RIAs Chandan Singh Padiyar, Ajya Pruthi and Swapnil Kendhe for useful discussions.

The shortfall in EPS contributions have to be deducted from EPF with curiosity. However is it price it?

For these circumstances, you’ll have to decide your withdrawal price. That is often outlined as complete bills within the first 12 months of retirement divided by complete corpus. However for our functions it might be extra significant to outline this otherwise.

Withdrawal Fee (WR) = Present annual withdrawal quantity divided by the present complete corpus (excluding an emergency corpus).

It’s because pension from different sources or rental revenue can be utilized by the retiree to deal with a superb chunk of annual expense, and the withdrawal quantity solely accounts for the shortfall in bills.

Let say the WR is 5.9% in 2023, and 12 months of retirement is 2015. Assuming an inflation of about 5% or 6%, we are able to approximate the WR within the 12 months of retirement. That’s the preliminary withdrawal price.

To do that, we use: preliminary WR is 5.9%/(1+5%)^8 = 4%

Right here 8 = time elapsed in years since retirement: 2023-2015.

We will even think about the annuity price of EPS pension (relevant solely in circumstances the place a lump sum is deducted from EPF to account for EPS shortfall).

Annuity price = Annual further EPS pension divided by lump sum paid from EPF.

If the preliminary WR is > 4%, then this in all probability means you might be withdrawing an excessive amount of out of your present corpus to satisfy the shortfall in bills after accounting for pension or rental revenue.

Suppose the annuity price of EPS pension is greater than the 30Y or 40Y RBI bond coupon price. In that case, you possibly can think about paying the shortfall in EPS contributions to get greater EPS pension however with out fully emptying your liquid corpus (excluding an emergency fund).

If the preliminary WR is < 3.5%, you in all probability have ample liquid retirement belongings to deal with inflation and emergencies. Therfore, you don’t want the upper EPS pension and may decide out.

If the preliminary WR is between 3.5% to 4%, it’s a cat on the wall scenario. Nearer examination and projection of future cashflow with cheap assumptions and expectations are essential to resolve whether or not one ought to go for greater EPS pension. It perhaps potential to handle with out the EPS pension, however there’s probability of working out of cash in your lifetime. You’ll be able to DIY this cashflow projection or seek the advice of a SEBI registered fee-only advisor from our curated checklist.

These with ample funds can use the EPS pension as a secondary pension supply if it has the next annuity price. You’ll be able to simulate this with our robo advisory instrument.

As I’m certain you’ve realised by now, it’s a reasonably powerful selection, and every case is completely different. So normal calculations or comparability is not going to assist. Now that the final date has been prolonged to Might third, there’s loads of time to think about particular person circumstances.

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