The finance ministry feels the guaranteed benefits of the Employees’ Pension Scheme (EPS) are untenable and, therefore, favours a shift to the National Pension System (NPS). It has asked the Employees’ Provident Fund Organisation (EPFO) to shut EPS.
The EPFO disagrees with the ministry’s view. It has said EPS provides better returns than NPS.
The Employees’ Provident Fund (EPF) has two elements - EPF and EPS. Of the 12 per cent of basic pay that goes to EPF, 8.33 per cent goes to EPS, subject to a cap of Rs 541 a month. Most feel this is the government’s way of pushing a product that didn’t draw the attention of investors.
How much of the EPF would be diverted to NPS? Closing EPS would mean losing an important instrument, says Ashvin Parekh, partner and national leader (global financial services), EY. There is no clarity on whether the pension contribution to NPS would be revised. Pension from EPS is linked to the number of years in service and the average salary drawn in the last year of service.
Given most aren’t prompt with investments, EPS is a better option, as NPS is meant for savvy investors. “Employees may not be able to choose between the authorised fund managers, unless the government mandates one. Even if one chooses a manager, he/she may not be prompt to track his/her portfolio and change the manager if the performance dwindles,” says Arnav Pandya, a certified financial planner.
While EPF is free, there is a small cost attached to investing in NPS. Unlike EPF, the EPS corpus can be withdrawn only if the total service is less than 9.5 years and one is aged less than 50. If one has worked for more than 10 years, he/she is liable for pension.
In the case of NPS, withdrawal leads to account closure. Up to 20 per cent can be withdrawn before you is 60; the rest has to be put in annuity. Low withdrawal could be advantageous in the long run.
Pandya says technically, NPS is a better option, as it allows long-term money (for post-retirement income) to be invested in equities. Even in terms of transparency on the amount being invested and the instruments being used, NPS scores over EPF.
Kolkata-based certified financial planner Malhar Majumdar feels if it happens, it would be a very good move. If one invests Rs 541 a month for 35 years in EPS at 8.50 per cent, he would accumulate Rs 15 lakh. “However, he will get the Rs 15 lakh only as pension up to Rs 3,250 a month as long as he lives. If he had received the Rs 15 lakh as a lump sum and invested it in fixed deposit, he would have made Rs 10,000 a month. NPS will earn better returns and pay higher pension,” he says.
State Bank of India pays 8.75 per cent on one-year deposits.
For pension benefits, one should be at least 58, and with 10 years of service. You would get pension even if you retire before the age of 58, albeit after some deductions, says Majumdar.
In 2012-13, NPS has given eight-14 per cent returns (average of 11 per cent), against EPFO’s 8.5 per cent returns. But EPS does not earn interest. Tax treatment for pension in both cases is at slab rate.
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