How The 'Lucrative' Higher Pension Option Can Actually Lower Your Retirement Corpus

The last few months have seen a lot of buzz around the higher pension option put forth by the EPFO and the deadline for which earlier was March 3 then May 3, and now, has again been pushed to June 26, 2023.

Those employees who are eligible for applying for a higher pension now have more than a month to further think if they should apply for this option or not. While the name in itself, i.e. higher pension, may sound lucrative to EPF subscribers, it's still important to assess the pros and cons before jumping onto application submission, including the possibility of a lower retirement corpus.

Higher Pension, But Lower Retirement Corpus

91mobiles

Firstly, subscribers to the Employees¡¯ Pension Scheme (EPS) who are opting for higher pension will have to also forgo the interest on the additional contribution of 1.16% of salary, which would further raise the amount taken away from the accumulated retirement corpus. This additional contribution has otherwise been effective since September 1, 2014.

While subscribers would get a higher pension on retirement, they would have substantially lower funds available in their provident fund account as well as before retirement if they need money to buy a house or to meet medical needs or in case of job loss, experts said, urging subscribers to carefully evaluate options.

The government had issued a notification mandating a 9.49% contribution of salary to the Employees¡¯ Pension Scheme (EPS)¡ªan increase of 1.16 percentage points from the current 8.33%¡ªfor employees opting for higher pensions. Since this is effective September 1, 2014, the amount and interest will be clawed back from the accumulated provident fund corpus.

Experts Express Word Of Caution

shutterstock

As per an ET report, Saraswathi Kasturirangan, partner at Deloitte, said the move to transfer funds from the provident fund to the pension account is required to be evaluated in detail since the higher pension will need to be viewed along with the significant dip in the accumulated provident fund corpus.

¡°The PF balances fetch a fixed interest on deposits year after year and where the higher contributions are made to pensions retrospectively, the interest earned over the past years also gets reversed,¡± she said.

To provide a larger pension after retirement, a portion of an EPFO member's EPF corpus will be moved to the EPS scheme from the date of joining if the person chooses the higher pension under EPS, an expert said in a Mint report, adding that your early retirement plan may get jeopardised if you choose Higher EPS pension.

¡°For individuals who want to retire early, applying for EPFO's higher pension may not be a wise idea because EPS pension eligibility is only granted after 10 years of employment and 58 years of age. The person receives a pension from the EPS based on a formula and a lump sum tax-free amount from the EPF account at the time of retirement".

The report mentioned that the availability of more effective alternatives like the government-backed NPS offering access to a configurable multi-asset portfolio and additional tax deductions could be a deterrent for more savvy investors with a longer residual period to retirement. Additionally, the option may not make sense for those seeking an early retirement as the eligibility criteria for receiving a pension requires the individual to have completed 10 years of service and must have attained the age of 58.

Also Read: Govt May Increase Mandatory EPF Contribution Limit To Rs 21,000

Should You Opt For Higher Pension Option?

istock

The conclusion rests on two primary decisions, as per Nrav Karkera, Head of Research, at Indian wealth-tech firm Fisdom. One, is EPF your product of choice for investing towards retirement and next, if a higher monthly pension appeals to you more than lumpsum benefits on retirement. If the answer to both is in the affirmative, the subscriber may proceed to further explore the opportunity offered through a higher pension option.

Else, if you prefer a higher amount in your retirement kitty instead of a pension, then not going ahead with a higher pension option seems the ideal choice for you. Nonetheless, if you still face confusion, it's better to seek help from a financial advisor and weigh the pros and cons before deciding.

Also Read: Child's Higher Education v/s Your Retirement: Which One To Prioritize

For more such interesting content and the latest financial news, keep reading Worth. Click here.