Retirement Savings: Can the EPF and NPS Help You Receive a State Pension?

The former state pension, available to workers who entered government service before April 1, 2004, was one of the most sought-after pension benefits for most workers. On the one hand, she spent around half of her last salary as an initial pension and, on the other hand, increased the love allowance (DA) every year to counteract inflation. However, there is no such pension for private sector employees as their primary reliance is on their retirement savings, which are invested through the EPF and NPS. The Employees’ Pension Scheme (EPS) pays a pension, but the amount is usually insignificant.

So can a private sector employee earn a regular state pension-like income with EPF and NPS? The answer is yes. Here’s a look at how this can be done.

When EPF alone can be enough

The Employees’ Provident Fund (EPF) enjoys statutory support because it is mandatory for private companies with 20 or more employees to invest part of their salary in this pension plan. This makes it one of the most widespread forms of old-age provision. So what are the odds of securing a reliable retirement fund if you rely solely on EPF for your retirement?

“Unless you back out of EPF, it would accumulate into a sizeable corpus. If invested properly, one can potentially build a decent income from a variety of sources. However, it doesn’t necessarily have to come from fixed income products,” says Suresh Sadagopan , Founder, Ladder7 Financial Advisories.

For example, if you started your job at the age of 25 with a base salary of Rs 25,000 and your salary has increased by 5% annually, then your EPF balance at the time of retirement at the age of 60 would be sufficient for government employees such as pension. As shown in the table below, you could earn a regular monthly income of Rs 1.85 lakh which is half of the last drawn monthly salary of Rs 3.7 lakh and keeps growing every year and can last 30 years of retirement to old age of 90 years.

When you need to charge your EPF with NPS

EPF may be sufficient for some, but may be insufficient for many employees. For example, if the return on EPF is less than 8% over the remaining period of employment, or there is a chance that the retirement body return will be less than the assumed 7% per year, you may need to look for a higher contribution. If your annual salary growth is more than 5% (see table), EPF alone may not be sufficient. Higher salary growth would mean that your last salary would be much higher, requiring you to have a much higher regular income and therefore need to build a much larger retirement body. This is where another retirement planning tool comes to your rescue, namely the NPS.

“This has to be properly planned. People need to realize that retirement is an important phase in life where one needs a sustainable income. So if people have been diligently contributing to EPF and NPS during their working lives, it would certainly be decent enough corpus to build a steady income,” says Sadagopan.

For example, if you started a job at the age of 25 with a base salary of Rs. 25,000 and this is growing by 10% per year, then the pension corpus needed for government employees like a pension would be Rs. 9.75 billion (see table). But your EPF corpus will only be Rs 4.73 crore. In such a scenario, if you contribute Rs 5,441 monthly on top of your EPF deduction and increase it in the same proportion as your salary increase, you could create a retirement body of Rs 5.02 crore through the NPS at annual return is 9%.

NPS increases net returns through additional tax savings

There is no alternative to the tax saving opportunity that insists on NPS contributions. This becomes an effective tool for people falling into the higher tax brackets to not only top up their retirement savings, but to supplement them with additional tax savings.

“Additional and exclusive tax deduction benefits of up to Rs 50,000 under Section 80CCD for investments in NPS help enhance total returns, particularly for those falling within the top 30% tax bracket,” says Rishad Manekia, Founder and Managing Director of Kairos Capital.

If you add that tax saving to your NPS return, the net return would be much higher. “Each additional tax saving helps increase your net return. Therefore, the added benefit of investing in NPS increases after-tax returns. I think not only tax benefits, but you should also look at the NPS as an additional way to save money for a retirement income,” says Santosh Joseph, founder and managing partner of Germinate Investor Services.

What if you used up the EPF credit midway through your career?

There are a large number of people who either have no savings in EPF or have very low balances mid-career. In such a scenario, an additional investment in the Voluntary Pension Fund (VPF) can be of great help.

“VPF makes up a very good portion of a person’s portfolio and savings, especially for investments. We know that when allocating assets for retirement it is good to have a certain amount of fixed income or debt and therefore VPF forms this part very well as it is also a long-term debt investment with a tax advantage and in the given scenario also with one good interest rate, it’s good to consider VPF to top up retirement savings,” says Joseph.

Besides VPF, you can also look at other options. “VPF can be one of the options as it offers fixed rates of return and tax deductions under Section 80C of the Income Tax Act. However, you have to compare it to other avenues like mutual funds, which offers flexibility and potential to bring better returns in the long term,” says Manekia. For example, people in the 40-50 age group have more than 10 years on their hands and can therefore use equity to support their retirement savings.

Investing for post-retirement inflation is a must

One of the most common miscalculations most people make when saving for retirement is the corpus’ ability to offset inflation by regularly increasing regular income. “The state pension is adjusted for inflation and also increases with salary commission. That wouldn’t happen here, so care must be taken when accumulating and determining income,” says Sadagopan.

Therefore, the bond corpus should either be large enough to absorb inflation, or it should generate a higher rate of return. “Depending on risk tolerance, part of the pension capital can be invested in equity-oriented instruments such as mutual funds,” says Manekia.

If you don’t like the idea of ​​investing part of your retirement capital in stocks, you need to do so earlier in the savings phase to shore up your retirement capital. “The sooner the better, because over time the risks in growth-oriented investments like stocks and real estate will even out. So it’s good to start early, start young, and start early,” he tells Joseph.


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