Navigating VRS Choices: Should I Withdraw My Superannuation Fund or Opt for a Pension?

This is my first post for the group. I have served my last organization for 23 years and now opted for VRS. The superannuation fund accumulated in my account is a little over 3 lakh. Now, as per the employer, there are two choices. First, withdraw this money after deduction of 33% tax. Second, opt for Retirement Pension, which will be calculated based on this amount. Can anybody help me to know the rules in deciding the pension amount? What are the other details on this pension - until what age will I be receiving this pension, and will my family continue to receive it after my death? Ultimately, which option is the most beneficial to choose?

Your posting does not give any idea as to whether you served in the public sector or a private company. In any case, you will be entitled to Provident Fund pension. Is the superannuation pension offered by your establishment the same as the PF Pension or something else? If you opt for the pension, you will receive it until death, and the applicability of the pension to your family will have to be decided by referring to the provisions of your pension scheme. If you have a provident fund pension, your family will receive it.

Please ensure that you have a provident fund pension, and if you do, then I suggest availing withdrawal of your superannuation fund in full.

Regards,

Madhu.T.K

Thanks for the reply. I have worked for Xerox India Ltd. The pension I was mentioning is the only pension we can avail. The PF fund is accumulated in a trust handled by the company itself. There is an option that instead of transferring to the next employer, the PF amount can be paid at the time of VRS/leaving the company to the employee. That is why I am planning to get the PF amount and use the superannuation fund in opting for a pension. Is it the right choice?

Dear Mr. Saxena,

You can opt for either or both. However, if your superannuation is something like the LIC Group Superannuation Policy/Scheme, it may be safer to opt for one. Legally, it may not be ideal to draw a pension from two different schemes, both being governed under different Government authorities.

Coverage will be till death. More commonly, the pension is payable on the life of the beneficiary. Family coverage is based on the policy guidelines/rules/deed of variation since Companies are known to tweak clauses of the standard template within permissible limits.

The corpus is utilized towards the payment of the pension of the type the beneficiary may opt and the benefit so received is tax-free. A lump sum payable by way of death besides the pension, if the employer has taken the Group Insurance Scheme in conjunction with the Group Superannuation Scheme.

On retirement, a member may opt for a pension from the normal retirement date. He may opt for the payment of the commuted value and pension, immediately in which case the benefits would be taxable.

In the Superannuation Fund, on retirement, in most schemes, the corpus (contributions plus interest of a member) is most commonly utilized to provide the following:
- Commuted Value (Equivalent to 1/3rd of the corpus) which is tax-free.
- The corpus that remains after providing for the commuted value is taken as the purchased price to provide for a pension.

For superannuation, the tax treatment under the IT Act for an approved fund is as follows:

- Employer's contribution is exempt from tax.
- Employee's contribution qualifies for a deduction under section 88 (para111) or a deduction under section 80C.
- Interest on the accumulated balance is exempt from tax.
- Section 10(13) grants an exemption in respect of payment from the fund:
(a). To legal heirs on the death of the beneficiary (e.g. payment to the widow of the beneficiary), or
(b). To an employee in lieu of or in commutation of an annuity on his retirement at or after the specified age or on his becoming incapacitated prior to such retirement, or
(c). by way of refund of contribution on the death of the beneficiary, or
(d). by way of refund of contribution to an employee on his leaving otherwise than in the circumstances mentioned in (b) to the extent to which the payment does not exceed the contribution made prior to April 1, 1992. (For instance, where the amount received by an employee does not include any contribution made prior to April 1, 1962, the whole amount is taxable).

The cost-benefit of opting for either would depend on the tenure and amount of the pension that you can draw from either. Depending on the corpus allocated to the PF Fund and the Pension Scheme thereon, and that in the Superannuation Scheme, it would be interesting to calculate which has a greater yield and then opt for one. As per my common understanding, up to a limit of 25% on PF + Superannuation Scheme permits taxable rebate under 80C of the IT Act. That means, in all probability, PF contribution is 12% and Superannuation Fund contribution is 13%.

You could check these facts from your office. If they could assist, the HR/Finance dept could help you in calculating the yield of both in terms of the commutable corpus and commensurate yield of both. You could then decide.

Regards,

Rahul Kumar