Is early withdrawal from EPF advisable?

From time immemorial, Employee's Provident Fund (EPF) has been the default retirement vehicle for most Indians. Typically, offering higher than bank deposit returns, the EPF has in most cases helped employees build a retirement corpus running to lakhs of rupees. Plus, returns are tax-free and come with low risk. However, the EPF of late has announced many changes including early withdrawal for a host of situations. The rationale behind these changes is to make EPF more user-friendly. But given the EPF’s role in retirement funding and social security, will these changes dilute the EPF’s objective? DNA Money spoke to a host of experts to understand what these changes mean to EPF subscribers.

Winds of change

The Employee Provident Fund Organisation (EPFO) over the past few years has embarked on a number of changes in terms of servicing subscribers, bringing in technology to speed up work, warming up to equity investment, and sprucing up its online/digital interface. From a subscriber point-of-view, the EPFO has made changes in terms of improving accessibility to the funds. Now, EPFO has allowed its members to withdraw up to 75% of their EPF corpus after being unemployed for more than one month and the remaining 25% can be withdrawn after being unemployed for more than two months. Partial withdrawal of EPF balance for various other purposes has also been allowed. Such withdrawals can be done for self and children's marriage, purchase of a house/home, children's education, treatment of own illness or treatment of family members, repayment of loans in special cases etc. Do remember that every time you take money out, your retirement corpus becomes smaller to that extent. 

Agreeing that the EPF structure is being changed ostensibly to offer better flexibility and access to their money in their hour of need, Suresh Sadagopan, founder, Ladder7 Financial Advisories said: "While flexibility is fine, EPF should seek to achieve the main objective for which it was created in the first place - retirement funding. To that extent, I'm not a great fan of offering too much flexibility in accessing their monies."

The EPF’s primary purpose is to ensure income during retirement. Adhil Shetty, CEO, BankBazaar concur. "If you withdraw from this fund, you will miss out on the benefits of the great returns EPFO provides along with compounded growth over the long term. You will then have to find another way to regenerate your retirement fund," he said. 

The EPF is predominantly debt and there is an assurance of a certain level of returns at any point, which currently is 8.55% (for 2017-18). This amount is tax-free and is probably one of the best returns one can get with low risk. Also, EPF interest rates are not expected to taper much in future, too. As it is politically sensitive it expected to remain attractive. 

Instead of changing withdrawal norms, experts opine that the EPFO should make changes in how the investment avenue functions. "The debt portion (of EPF investment) is not able to meet the returns that the EPF is currently offering, that is, 8.55% and the deficit was to be met through overall better returns in the portfolio. Allowing participation in equities is a good thing as most people are not benefitting from this asset class. To keep the equity portion of the investments in good shape, the EPF should be permitted to invest in broader index ETFs (Exchange Traded Funds) only, and not only in CPSE ETFs," says Sadagopan.

Widen retirement funding 

While personal finance experts see the utility of EPF, they believe that depending only on the EPF to fund financial needs post-retirement is not the optimal approach. Tarun Vohra, Founding CEO, Integra Profit said: "A person should adopt EPF and should invest 15% of their income, giving a 5.5% post-tax and inflation or real return. The balance 85% should be put in debt/equity investment portfolios depending on the risk appetite."

Yes, the advantages of EPF are difficult to ignore. The EPF's tax-free return of 8.55% that is equivalent to a pre-tax return of 10.7% for those in the 20% slab rate. Investors taxable under 20% slab rate can claim up to Rs 30,000 as a tax deduction under the section 80C. There is an annual compounding of interest on the EPF side. Plus, EPF accounts are conditionally liquid in nature and partial amounts can be withdrawn. At the same time, debt and equity mutual funds should also find a very meaningful place in the retirement investment planning, argues Vohra.

"Frequent changes to the EPF scheme and structure will disrupt a fund manager’s performance as the goal keeps changing. Lax early withdrawal rules will also force fund managers to keep more non-invested money and bring down the EPF returns due to lack of desired cash," Vohra. He also pointed out that since the EPF invests in equity ETFs, which is a passive form of investing, the possibility of alpha or the extra return over the benchmark return is poor.

EPF subscribers, on an average, received around 9% interest for several years, in the past. It is true that the return from any long-term pension fund should be much higher. Adhil Shetty, CEO, BankBazaar said: "The fraction of money that is being invested into the ETF is only 15% of the total sum of money. This is a very small fraction of the money from the EPFs that is invested into the market."

EPF contributions are not optional. Every business has to contribute towards an employee’s EPF by law, and every salaried person would have an EPF account. Alternatives to EPF include the Public Provident Fund, National Pension Scheme, as well as long-term investment in mutual funds. However, these are not an either/or solution. A good mix of investment products, including EPF, PPF, NPS and mutual funds can help you build a substantial corpus, added Shetty.

ALTERNATIVE INVESTMENT

• Alternatives to EPF include Public Provident Fund, National Pension System, as well as long-term investment in mutual funds
   
• 8.55% The current EPF interest rate. Since returns are tax-free, the equivalent is 10.7% for those in 20% slab rate