In one of the recent articles we had taken a detailed look at Employee Provident Fund or EPF. One of the components of this EPF is the Employee Pension Scheme or EPS. We covered what the EPS is and what it is supposed to do. But, we never talked about how much pension we might get after we retire. The purpose of this short article is to give you a relistic idea of how much pension you may get post retirement through this EPS Scheme.
To Refresh our Memory - What is Employee Pension Scheme?
The EPS is a saving scheme wherein a small sum of money is accumulated on a monthly basis over the duration of employment so that, it can help the employee receive a pension after retirement.
When can one start Receiving Pension from EPS?
An employee can start receiving pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58 or 50 years.
Points to Remember:
1. No pension is payable before the age of 50 years.
2. Early pension — that is an employee receiving after completing 50 years of age but before 58 years is subject to a reducing factor @ 4% for every year falling short of 58 years. In case of death / disablement, the above restriction is not applicable.
3. The pension amount is payable to the eligible subscriber till he survives. On the death of the employee, members of his family—whom he has nominated—are entitled for the pension.
What Happens if I 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 no. 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|
For Ex: An employee exits from employment after 3 years and 8 months of service with a basic salary on exit Rs. 5,000 - 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.
What can I do if I have crossed the 10 years of Service?
If total service of employee is more than 9.5 years and age of employee is less than 50 years of age, they can only claim a scheme certificate. They can add services at different companies to calculate total service and can get pension from the age of 50 years onwards. If they have the scheme certificate for all services, they may apply directly at EPF office which covers the area. They needs to fill up Form 10-D, get form attested by a Nationalized Bank manager with photo and other required documents which is mentioned in the Form-10D to avail the Pension benefit.
So, If you are switching jobs you can get this Scheme Certificate and avail the pension option when you retire.
What is the Maximum Pension One Can Get from EPS?
Under EPS, the monthly pension is decided on the basis of ‘pensionable service’ and ‘pensionable salary’.
Pensionable Salary = Last Drawn Basic Monthly Salary
Pensionable Service = No. of years of Service you put in as an employee of your company
The formula to calculate pension is:
Monthly pension = (Pensionable salary X Pensionable service) ÷ 70
Did you read the article on EPF carefully? Did you note that the upper limit on EPS contribution is based on a Monthly Basic Salary of Rs. 6,500/-?
So, if the amount contributed every month is on a salary of Rs. 6,500/- what do you think will be considered as Pensionable Salary for the above formula???
As Expected, the pension is calculated on a monthly salary of Rs. 6,500/-
So if you have worked for say 35 years, your monthly pension will come to Rs. 3250
(6500 * 35) / 70 = 3250
Note: Rs. 3,250 is the maximum pension one can get per month through the EPS Scheme.
Are you disappointed after seeing this number?
Unfortunately, So was I.
This amount is too less. This amount wouldnt be enough for an individual in todays cost of living. Imagine the cost of living after 25 or 30 years when we retire?
To Make Matters Worse - If you invest this same Rs. 541 in a recurring deposit with a reputed Bank that offers compound Interest (That is compounded on monthly basis) at 8% interest rate per annum for 35 years, you would get Rs. 12,40,990 as maturity value.
If you purchase an Annuity Plan (A Fancy Term for a product that will pay you monthly pension) that offers 7% returns per annum, the monthly pension you will get is approximately Rs. 7,200/-
As you can see - The amount you will get is almost double of what pension you may get through EPS.
Sadly, all these limits and schemes were formulated in the 1980's when this Rs. 6,500/- per month was considered an extravagant salary that people yearned for. It is high time the Government of India woke up to the current state of affairs and revised all these numbers that make no sense today. The purpose of all these schemes is to help the Salaried Class of India survive when they retire after 25-30 years of service. Unless, these numbers are revised, there is practically no use in contributing to these schemes whatsoever...
My Thoughts on this:
Though the idea based on which these schemes were formulated need to be commended, they need to be tweaked in order to be effective. I would strongly suggest you plan for your retirement meticulously and ensure that you have a happy retirement. There have been multiple articles in our blog that cover Retirement Planning. You can visit the Retirement Planning Home Page of our blog by Clicking Here