Are you planning a career change? Why not withdraw the savings accumulated in the EPF accounts of your employees? Withdrawing from the EPF is a relatively simple process, involving filling out a form with your personal information and giving it to your human resources colleague to complete. After a few weeks, you will receive a check or the money will be deposited into your account.
Varsha Ojha, a top media executive, did just that. He changed 6 jobs in 8 years between 2002 and 2010 and at the end of each job he opted to withdraw the accumulated EPF amount. “It was the only obvious option at the time. I was not familiar with the transfer process and liked being scheduled rather than having money in many places.
EPF rules prohibit retirements during your years of service, except in some emergencies. However, some take advantage of certain exceptions and allow flexibility. For example, you can withdraw up to 75% of your account balance after one month of unemployment. If you have been unemployed for more than two months, you can take a full leave. These could be tempting propositions for those pursuing their entrepreneurial ambitions or for those in a gap year.
Withdrawing and using the money as you wish seems logical. Even for those with a low net salary, a capital withdrawal is something of compensation. Or maybe, like Ojha, it’s about staying in control and planning the next steps, rather than just pocketing the money.
However, a better way to make more money is to simply leave your EPF corpus intact. Transfer it to your next organization when you make that leap and let it grow. There is a very good reason for that.
Compounding: The eighth wonder of the world
You may need extra money for a medical emergency or unavoidable expenses. But you are also missing out on higher returns if you exit ETH too soon.
How the EPF works: 12% of your base salary is paid into your EPF account. Your employer then offsets this with an additional 12% contribution. (8.33% in the employee benefit plan and 3.67% in the EPF). All with the aim of building a corpus for your retirement. Contributions can be made up to any age, as long as you work for a contributing organization.
Let’s say the accumulated EPF at the end of your first year in your first job was around Rs 25,000. Now he decides to change jobs and Rs 25,000 doesn’t seem big enough to bother with a transfer so he just withdraws it.
You may think that once you have received the money, you will have better options on how to invest it, rather than letting the EPFO do it. Withdrawing money can often be an easy option, but when the lump sum arrives, it can give a false impression that it’s a bonus to spend. Ojha admitted that he spent most of his initial withdrawals and eventually started to invest part of late.
Assuming an average EPF rate of 8.5%, this Rs 25,000 would have more than doubled in 10 years, reached Rs 85,000 in 15 years, and would have been more than 5 times the value of Rs 1.28 lakh withdrawn. instead of what had been transferred.
Imagine starting with Rs 1 lakh (instead of Rs 25,000). After 20 years you end up at Rs 5 lakh. If you add up many such withdrawals, the impact on your future financial security can be significant. Every time you delete, you delete what was added and saved. If you’re looking for instant access, you may lose the benefit of compound interest.
According to Deepali Sen, founder of Srujan Financial Services LLP: “Some of my clients retire when they retire or take a gap year, but most change when there is a job change. The corpora are reinvested according to your needs.
Withdrawing your EPF balance without an action plan could potentially mean spending it. If you must retire, make sure you can get this corpus up and running again.
Ojha has now been part of the same organization for over 11 years. Consequently, due to the strict rules of the EPF, you cannot withdraw your corpus from the EPF. The good news is that now you can at least see the impact of compounding on the corpus accumulated during that time. In retrospect, with a better conscience, he admits that he would have made a different decision.
“In the case of a simple position change where the EPF can be transferred, there is always an option to do so. Even in cases where a person embarks on a business trip as an employee, it is preferable not to retire immediately. You can keep the money for 36 months with interest on the corpus; It is safe to leave while you decide how things will go in the next stages,” says Vivek Rege, founder and CEO of VR Wealth Advisors Pvt Ltd.
He supposes that the amount of Rs 25,000 EPF from his first year of employment increases by 10% over the next 10 years. But every time you change jobs, you retire and spend that amount. What you stand to lose is potentially Rs 4 lakh in contributions which, if it remains invested in EPFO, could be worth five times over 20 years.
It’s not just accumulated savings, but long-term compounding at a relatively higher interest rate, that helps the sum of these annual contributions make up a significant portion of the total long-term debt portfolio. Rege added: “Withdrawing EPF early also means you are taking safety capital and reinvesting it in market-related securities or taking some risk. Please note that the accumulated corpus, once withdrawn, cannot be reinvested in EPF.
With a Universal Account Number (UAN) for EPF accounts, holdings, publications with no age limit, and SMS updates of publications and corpus, EPF has become an investment on a par with other financial investments and whose benefit you cannot ignore for a long time. term holding and capitalization.