The Employees' Provident Fund Organisation (EPFO) extended the deadline for selecting a higher pension until May 3 on Monday.
"The joint option for employees who were in service previous to September 1, 2014, and continued in service on or after 01.09.2014 but were unable to exercise joint option under the Employees' Pension Scheme can now be exercised on or before May 3, 2023," the EPFO stated in a post on its website.
This comes after the EPFO issued a set of instructions to its zonal offices on February 20 to allow a section of its older members to choose for higher pensions under the Employees' Pension Scheme (EPS).
Calculating the pension:
First and foremost, it is essential to understand how the pension is calculated. Although a pension calculating tool is accessible, there is no tool available along the lines of tax calculators that show whether the old or new tax system would be beneficial. Perhaps a tool to evaluate the higher pension choice would have been useful.
The pension is determined by multiplying the pensionable wage by the pensionable service (the number of years of EPS contributions) and dividing by 70. Prior to the August 22, 2014 announcement, the pensionable salary was defined as the average salary of the previous 12 months. This message has been changed to the average salary for the previous 60 months. This move was also challenged, and the Supreme Court (SC) ruled in EPFO's favour.
As a result of the new regulations, the subscriber's pensionable salary may be lower where the salary was increased in the previous 12 months and higher where the salary was cut in the previous 12 months.
Presently, a subscriber is entitled to a pension after 10 years of contributed service. Otherwise, a lump sum payment from the pension fund is made. As a result, it is important to make sure that one has enough years of service remaining before retirement to meet the 10-year contributed service requirement.
Factors to consider while choosing the higher pension option:
Basis of calculation
The pension is calculated using EPS contributions. When a subscriber selects the higher pension option, his or her previous contributions and interest will be reassigned to EPS, reducing the subscriber's accumulated provident fund balance.
Where the subscriber may require lump sum money to meet certain financial goals, such as children's education or marriage, the subscriber may continue with a provident fund rather than a pension, because lump sum money would be available at retirement or even earlier if the subscriber can take an advance from the provident fund.
The tax angles
Taxes may also play a part in this situation. Retaining money in PF may be more tax advantageous. Today, the withdrawal of a PF accumulated amount upon retirement after five years of contributed service is tax-free. Yet, the pension is completely taxable.
Additional pension contribution
It should be recalled that EPFO requested an extra pension contribution of 1.16 per cent of earnings beyond Rs 15,000 per month in its 2014 announcement. The Supreme Court did not deny EPFO's authority to demand such additional payment but instead determined that the amendment must be made by legislative amendment to the laws, for which it allowed a six-month period.
Thus, will the basis for calculating pension change in the future? It is hard to predict, however, keep in mind that pensions are based on the pension corpus and the return it earns.
Annuity plans
Last but not least, while there are numerous annuity plans accessible following withdrawal from PF, money held by the government might provide more assurance to subscribers due to the government guarantee for this programme. This may persuade many customers towards the pension option.
