Pension Commutation: Employees’ Pension Scheme (EPS)
In a major relief to EPS Pensioners, EPFO has amended the Employees’ Pension Scheme (EPS’95) to restore the Pension Commutation; the option was withdrawn in 2009. EPF Subscribers eligible for pension under EPS had been demanding for amendment to restore Commutation, or advance partial withdrawal under the Scheme.
The decision to restore the Commutation of Pension will benefit Individuals availing the option at the time of retirement, in form of lump sum payout. Option to commute the pension was withdrawn more than 10 years ago. Commutation of Pension allows the Pensioner to withdraw lumpsum from the pension corpus by commuting 1/3 of the pension for a period of 15 years. The full pension is restored on completion of 15 years.
The move will benefit around 6,30,000 subscribers who had applied for the commutation of pension in 2009. Government Employees already have the option to commute pension on superannuation. There was a growing demand among EPS Pensioners to restore the commutation of pension. The decision was taken at a meeting on 21st August, 2019 and the implementation has come into effect starting from 1st January 2020.
EPF Members are covered under the provisions of Employees Pension Scheme (EPS) subject to fulfillment of the conditions laid down for the same. Members joining EPF after August,’14 with Salary/Wages above Rs 15,000/- are not covered under the EPS.
EPF Members and respective Employers contribute 12% of the Basic plus Dearness Allowance to the EPF corpus. Out of the Employer’s contribution, 8.33% or Rs 1,250 (whichever is higher) is contributed to the EPS Fund while the remainder is deposited in the EPF Account.
EPF Member needs to contribute to the EPS Fund for minimum of 10 years to be eligible for pension benefit.
Pension Commutation under EPS
#Commuted Lumpsum Benefit is tax free in the hands of the pensioner.
#1/3rd of the Actual Monthly Pension is cut for the next 15 years, the reduced amount is paid in lump sum.
#The lumpsum may be invested in financial products offering better returns.
#The original pension amount is reduced by 1/3rd, full pension is restored on completion of 15 years, providing enhanced financial cover at older age.
#EPF Subscribers opting for commutation receive enhanced lumpsum benefit at the time of retirement which may be used to meet financial obligations.
#The risk associated with such commutation is that Individual may lose the hard earned money due to lack of financial planning which may cripple the financial well being of an Individual post retirement.
Individual at the time of superannuation, completing 10 years of service is eligible for Pension under EPS.
Full Pension Post Retirement (Non Commuted): Rs 12,000/-
Actual Pension Post Commutation: Rs (12,000-12,000*1/3) = Rs 8,000/-
Commuted Value of Pension: 12000*1/3= Rs 4,000/-
Annual Commuted Value of Pension: Rs 4,000*12= Rs 48,000/-
Lump sum Withdrawal on Commutation: Rs 48,000*15= Rs 7,20,000/-
Should One Opt for Pension Commutation?
Commutation of Pension does come with number of benefits:
1) EPS only provides Pension cover to the Member, commutation helps to withdraw lump sum from the Fund.
2.) Commuted Fund may be invested in tax efficient financial products offering higher returns/interest rate.
Commuted Pension also involves few risks which an Individual needs to evaluate:
1.) The Pension is reduced by 33% for the EPS Member for next 15 years.
2.) Poor/Lack of financial planning may result in escalation of the financial woes for the retired Individual.
Individual needs to have a robust financial plan in order to enjoy the benefits of pension commutation. Opting for commutation without proper financial planning could prove very risky for the EPS Member.
This article is for informational purpose only. Readers are advised to research further to have detailed knowledge on the topic. It is very important to do your own analysis and consult your Financial Advisor before arriving at any conclusion.