EPS Withdrawal vs Monthly Pension: Which Is Better?

Understanding the Employees' Pension Scheme (EPS)

The Employee Pension Scheme was started in 1995 and is administered by the Employee Provident Fund Organisation to provide monthly pension benefits to the eligible members after retirement. Here are the benefits provided under EPS:

• The employers contribute 8.33% of the wages to the pension fund for their employees.
• There are no contributions from the employee.
• The benefits are decided based on pensionable salary and years of eligible service.

What Is EPS Withdrawal?

EPS withdrawal means the member takes a lump sum payment instead of the pension scheme when they leave the service before a 10-year period. The sum can be withdrawn using Form 10C under specific conditions. Below are the situations where the EPF withdrawal is allowed:

When EPS Withdrawal Is Allowed

• The total service is less than 10 years
• Members are no longer a part of the organisation that provides EPF coverage
• The member chooses not to continue EPS benefits. The member does not want to continue the EPS benefits

What is the Monthly Pension Under EPS?

In case the term of service exceeds 10 years or more, the EPS benefits cannot be withdrawn as a lump sum, but rather the member becomes eligible for a monthly pension that's payable after the member reaches the required age (~58 years). The service of the pension is lifelong for the member and can also extend to the eligible family members under the survivor member provisions.

EPS Withdrawal vs Pension: Core Difference

The difference between EPS withdrawal vs pension is in the case of short-term liquidity vs long-term stable income.

Eligibility Rules That Determine the Choice

The EPS rules around the 10-year service limit decide if the member can withdraw their funds or if they should opt for a pension scheme.

If the service period is less than 10 years

• The member becomes eligible to withdraw their funds.
• Pension eligibility is not established because of the lack of service years.
• The member can, however, choose a scheme certificate to preserve service.

If the service period is more than 10 years

• After 10 years of service, withdrawals are not allowed for the members.
• Pension is the mandatory benefit for the members in this case.
• Scheme certificates are issued in case the member is leaving before the age of 58

How the EPS Monthly Pension Is Calculated

Below is the formula EPS follows to calculate the pension:

Monthly Pension = (Pensionable Salary × Pensionable Service) ÷ 70

Where:

• Pensionable Salary = Average salary of last 60 months (subject to ceiling).
• Pensionable Service = Total years of eligible service.

This formula rewards long-term employment continuity.

Advantages of EPS Monthly Pension

Below are the benefits of choosing the EPS monthly pension in detail:

1. Lifetime Income Security

   If the member qualifies for a pension, they can access a steady monthly income for the years beyond their employment. This also means reduced dependency on savings or other investments.

2. Protection Against Longevity Risk

   The pension is lifelong and does not have a maximum age cap.

3. Family Pension Benefits

   If the pensioned member passes away, the dependents, such as their spouse, children or parents, will receive the pension support if eligible.

4. Government-Backed Scheme

   EPS has an established statutory framework for operations, which provides predictable benefits.

Advantages of EPS Withdrawal

Below are the benefits of choosing the EPS withdrawal in detail:

1. Immediate Liquidity

   Members can access the liquid funds immediately during career transitions or emergencies.

2. Flexibility in Use

   These immediate funds provide options to invest or can be used for personal needs as well, or even redirected towards other financial goals.

3. Suitable for Short Service Periods

   If the service period is under 10 years, the employee may not benefit from the pension accrual.

Limitations of EPS Withdrawal

Below are a few limitations of the EPS withdrawal:

• The income is a lump sum, which means no future pension.
• The member loses lifelong pension eligibility if they choose to withdraw.
• If the member passes away, there are no benefits to their dependents.
• The withdrawal amount is smaller compared to the long-term value the pension provides.

Limitations of Monthly Pension

Below are a few limitations of the EPS Pension:

• The employees cannot access their funds as a lump sum.
• The pension amount is dependent on the wage ceiling and won't exceed that.
• If the member exits early, their pension receipt may be delayed.

Role of the Scheme Certificate in EPS Decisions

The employees who choose to leave the service before retirement but contribute to EPS can get a scheme certificate. The role of this certificate is explained below:

• Keeps the pensionable service.
• Allows the benefits to continue when the member joins the EPF employment.
• Will enable pension eligibility for the member once their service period reaches 10 years.

Impact of Job Changes on EPS Decision

Frequent or recent job changes do not affect pension eligibility, but they need a proper transfer of EPF accounts. Pensionable service accumulates even if the employer changes, which strengthens the long-term benefits. But early withdrawals interrupt the continuity of the cycle.

When Is EPS Pension Generally the Better Option?

A monthly pension scheme is preferable if:

• The service period has reached or crossed the 10-year mark.
• Retirement income is a security for the member and a priority.
• The member wants long-term income rather than short-term liquidity.
• The member wants to secure their family financially.

When EPS Withdrawal May Be Suitable

A lump-sum withdrawal is preferable if:

• The service duration does not reach the 10-year mark
• The member has exited the EPF covered organisation permanently.
• The member has other financial safety plans after retirement.
• There are urgent needs that need to be met and are more important than future needs.

Conclusion

The comparison of EPS withdrawal vs. pension scheme comes down to the choice between short-term financial needs and long-term financial security. EPS withdrawals provide quick financial aid but take away the pension eligibility, and the monthly pension provides a stable monthly income with social security protection and family protection. The member needs to evaluate and consider their service tenure, personal needs and retirement goals before choosing a plan.