Getting a lifelong regular income after retirement is one of the most critical life goals for most salaried people. The Employees’ Pension Scheme, 1995, or EPS-95 is among the few options that offer lifelong regular income during retirement years, especially for private sector employees. This scheme typically pays pension after the individual reaches retirement or the age of 58 years. “Under the pension scheme (EPS-95), a member can avail monthly pension if he has rendered eligible service of 10 years or more and retires on attaining the age of 58 years,” says Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co.
However, many people leave their salaried employment quite early either voluntarily or due to some unavoidable circumstances such as chronic illness or disability. Can these people get an early pension under EPS-95? The answer is yes. “According to the pension scheme, a member may be allowed to draw an early pension before attaining the age of 58 years,” says Ramchandani.
Members of the EPS-95 are entitled to early pension if they satisfy certain conditions. The first condition is that such members must have completed the minimum eligible service of 10 years. “Eligible service means the period of actual service rendered by a member for which the contributions to the fund have been received or are receivable. For those who were members of the Employees’ Family Pension Fund, their period of service when they were members of such a fund till November 15, 1995, is also taken into account for eligible service,” says Ramchandani.
The other condition is that such member either retires or ceases to be in employment before attaining the age of 58. “Early pension can be availed by EPS members if they retire or cease to be in employment before 58 years of age. This can be availed by members once they turn 50 years of age,” says Sowmya Kumar, Partner, INDUSLAW.
Early pension will happen at a cost
The next crucial question is whether such persons would get a pension that is equal to the amount they would have received if they had retired at 58 years. The answer is no, as your pension will be lower if you go for early pension.
There is a process that helps you calculate the reduced pension. “The reduced pension is therefore the monthly member’s pension minus the rate of 4% per year, depending upon the age of the member opting for early pension,” says Ramchandani.
So, if you have calculated the normal pension at the age of 58 years, then you can very well calculate the reduced pension. “For example, if members choose to avail a monthly pension when they are 57, then their monthly pension (calculated as per the formula above) will be reduced by 4% (they will be eligible to about 96% of their monthly pension),” says Kumar. Therefore, instead of, say, Rs 10,000 at the age of 58, you will get Rs 9,600 from the age of 57.
If you go for an earlier retirement, the reduction will be bigger. “For example, if a member opts for an early pension at 51 years, which is 7 years short of the eligible age of 58 years, then the amount of pension calculated will be reduced by 28%,” says Ramchandani. In the above example, the pension will come down to Rs 7,200 from the age of 51 instead of Rs 10,000 at 58 years.
Things to consider when deciding for early pension
So how should you decide whether to go for an early pension or not. “Waiting until the age of 58 years to retire and receive the monthly pension is more beneficial in terms of quantum than opting for an early pension under the pension scheme,” says Ramchandani. The best case to get the full eligible pension is when you get pension after the age of 58. So, if you can avoid going for an early pension, it will be more beneficial.
For many people who have very low pensions under EPS-95, especially those who have not gone for the higher pension option, deciding to go for an early pension may not have a big impact. “This depends on, among other things, the financial circumstances of every individual. In any case, unless the member has opted for the higher pension, the quantum of monthly pension may not have a significant impact on retirement planning, especially considering inflation,” says Kumar.
However, this decision will be critical for those who have opted for the higher pension and are eligible to get it. “Given that a member opting for early pension will receive a reduced amount of monthly pension from the date he opts for the same, it is not as beneficial as receiving the full amount of monthly pension after attaining the age of 58 years,” says Ramchandani. So, if you are eligible for higher pension you should avoid going for early pension as long as possible.
People who have planned an alternative career or have investments maturing at a later age but need immediate income support, may go for early pension. “A member may consider opting for an early pension under the pension scheme (EPS-95) if they wish for an early retirement as this will provide them with a fixed monthly income, albeit at a reduced rate,” says Ramchandani.
If your circumstances have compelled you to go for early retirement and you need this support immediately, then it will give you much needed timely regular income support. “A member can also consider opting for an early pension when they retire due to various reasons such as ill-health or reduced life expectancy,” suggests Ramchandani.