Retirement Portfolio: Arnav Pandya on pension, PF and retirement portfolio

“In the next few months, we will see the EPFO come out with detailed guidelines on all these parts about higher pension and how it will be calculated for those who are in employment or who have joined before September 2014 and how that will be funded,” says Arnav Pandya, Founder, Moneyeduschool.

A salary employed individual has to share some portion of their salary as PF amount that goes under the provident fund and an employer share also gets counted into it. What is the entire calculation of the percentage that gets into the provident fund?
Let us now first understand the entire structure of the provident fund. There are two parts of the entire provident fund contributions – one which is known as the EPF or Employee’s Provident Fund. It is one part which is where the monthly amount gets accumulated and it is like a wealth creation option. The second part is also an employee’s pension scheme. So, there is also something called an EPS linked to the provident fund.

Let’s first look at it from the point of view of the employee. If you are an employee in the private sector, you have to contribute 12% of your pay to the EPF. Now understand that your entire 12% here will go into the provident fund corpus which is known as the EPF; zero percent from the employee goes to the pension part.

Now let us come to the employer’s part. The employer is also contributing 12% but here what happens is the employer first has to contribute 8.33% of the employee’s salary to the pension part and so the EPS gets 8.33% but only up to a ceiling of Rs 15,000. So for Rs 15,000, 8.33% comes to Rs 1,250. So if there is an employee whose salary is less than Rs 15,,000 then 8.33% of this goes to the pension part while for people who have a salary above Rs 15,000, the cap is at Rs 1,250 currently. So Rs 1,250 of the employer’s contribution comes here and the remaining amount will go to the employee’s provident fund. This is how the break-up is.

Remember very clearly that the employee does not contribute to the pension part, only the employer does and the entire part of the employee’s contribution goes to the provident fund part. Now the pension part is important because this is the area where if you are eligible, then at the time of your retirement, you will start getting a pension based on the working of the EPS.

Now let us talk about the pension that you will get in your hand. What is the new calculation for it and who can avail this because not everyone will be getting an increased pension amount?
The pension calculation is made in a particular manner. For example, the maximum amount of period for which a person can work is 35 years and there is a capping here also. So the pensionable salary based on which the pension is calculated is capped at Rs 15,000 and the maximum pension that one could get is Rs 15,000 multiplied by 35 by 70 which comes to Rs 7,500 per month. Now this is as per the old calculation.

There was an amendment in 2014 which said that any employee who joins after September 1, 2014, and whose salary is more than Rs 15,000, would not be able to get a pension under the EPS. Now this amendment which was made was struck down by several high courts across the country and so the matter went to the Supreme Court.

The Supreme Court has recently given a judgement which has said that this amendment will stand which means that any employee who joins after September 1, 2014, will not be able to get the benefit of the pension scheme.

Second, the judgement also says that the pensionable salary based on which the calculation is made will remain at Rs 15,000 but there is one exception and this is an important part because it is for these people for whom the pension calculation will change and this will increase. It says that there are many people who have joined before say September 1,2014. For these people, they have an option that if their salary is more than 15,000, they could contribute more and get a higher pension.

These people still have an option of four months from the date of the judgement to continue with this kind of additional contribution so that they can get a higher pension. Now for anyone who falls into this category, the pension which they will get will obviously be higher because there is no capping of Rs 15,000.

So for example, if you have a salary of Rs 40,000 per month at the time of retirement based on the calculations and you work for say 35 years. then according to the calculation your pension will come to Rs 20,000. This was earlier capped at Rs 7,500. So this specific category of people who opt for a higher contribution to the employee pension scheme will be eligible for a higher pension.

Now there is one more technical detail here that when earlier this kind of higher contribution option was approved, it was said that the employees have to contribute 1.16% for the higher contribution. Now the Supreme Court has said that you cannot take this additional amount from the employees because in the employee pension part there is actually not supposed to be any contribution from the employee but it is only the employer’s contribution.

So, this part which has been struck down the Supreme Court has given the EPFO a period of six months to ensure that they come up with a new working so that the additional pension which people earning above Rs 15,000 have opted, there is some way to fund it because if that is not done and there is no contribution, then the corpus will be drawn down just to pay the higher pension.

So in the next few months, we will see the EPFO come out with detailed guidelines on all these parts about higher pension for those who are in employment or who have joined before September 2014 will be calculated and how that will be funded.

What about those people who want to get a higher pension? How can they avail this? Are there any documents or submissions that need to be done within a particular timeframe?
For those who have joined before this amendment came in, which is before September 2014, they have a period of four months to ensure that they enroll themselves. For this, they need to submit a joint declaration with their employer saying that they have agreed for this kind of higher contribution towards the pension scheme.

The other thing is that till the time the EPFO works out another way of funding, this kind of higher pension, the contribution for which has to be made by the employee which is 1.16% which was decided then, will have to be made.

For example, if you have not joined and today you want to be a contributor and get a higher pension, because you were in employment before this cut off period, then you will have to contribute the entire amount for the period that you are eligible for. That much has to be kept in mind but these people are the ones who will be eligible and a new working order will come soon which will then clarify the entire matter.

But overall, this judgment is a way in which the entire issue which has been hanging in confusion has been sorted out so that now there is a clear way forward.

Those people who are not in the workforce post September 2014 and have opened their pension account and have been contributing before, how can they avail of it? Do they have to reach out to the employer and then contribute the rest of the amount?
Yes, so the question is that those who were in employment earlier and are eligible and if their salary is more than Rs 15,000 want to join this and get a higher pension when they retire or they want to look at other options because what has happened is if you look at the overall scenario even for an employee, there are so many other options available in the market which can help you get a pension.

The amount of pension which you would get from this scheme is not adequate to meet all your requirements because obviously people have a higher need for funds. Today, there is the NPS which is a specific retirement product which can get you pension. Also, there are various mutual funds wherein they can accumulate amounts.

So it is a question of choice that if you want to go for this scheme, this is the kind of working which will be there. But if you want to have a higher rate of return because you have time on your side and you are willing to take some risk, then there are other options also available in the market wherein you can create a retirement portfolio which is more suitable for you.

In any scenario, do you think the employer can decide not to pay the increased pension?
The pension comes from the EPFO. The employer is restricted to just contributing the amount which they have to contribute and that contribution’s limit has been fixed at Rs 15,000 so that is not going to change. The employer knows that this is the amount up to Rs 15,000, 8.33% is the maximum amount which they have to contribute. The moment the employer contributes that, their part is over. The amount then goes to the Employee Pension Scheme and it is the pension scheme which will have to pay out the pension at the time of retirement.

What about people who open their PF account post 2014? Then they are the new people in the workforce and obviously they do not have this kind of a privilege in their hands. A retirement portfolio needs to definitely be designed and everyone should be thinking about it as a very important financial goal and not rely only on their PF amount. Traditionally, Indians get the money from their PF and then later either invest it or buy real estate. How important is it for this mindset to change?
There are two points here; one is that the provident fund part continues and that is not affected. So even if you have joined after September 2014. the contribution to the provident fund accumulates and that will come to you.

Now for those who have joined after September 2014 and if the salary is more than Rs 15,000, then from the employee pension scheme, they will not get a pension which means that if they want to plan for pension…

Read More: Retirement Portfolio: Arnav Pandya on pension, PF and retirement portfolio

2022-11-18 04:44:00

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