Are you ready for your retirement?
Whether it’s forty years away or twenty years, getting ready for your retirement is vital. This is especially important considering how, according to the Randstad Workmonitor Q1 2015 survey, 82% of employees in Malaysia expect to retire between the ages of 60-65 – well above the retirement age. RinggitPlus also discovered that 47% of Malaysians aged 35 and above have not even started saving for retirement.
What could this mean? Possibly that the majority of working aged people think that they do not earn or have enough to save for their retirement. And neither are they putting effort to prepare for it.
The two channels you should take note of is the Employee Provident Fund (EPF) scheme and the Private Retirement Schemes (PRS). If you are only starting to seriously consider your retirement, then you might have only heard of EPF and PRS in passing. If you haven’t, then this is old news.
But our goal here today is to give you a crystal clear comprehension on how EPF and PRS works. So, what are EPF and PRS?
EPF is basically a compulsory retirement savings plan under the purview of the Ministry of Finance, specifically the Employees Provident Fund Act 1991 (Act 452). Its aim is to provide maximum social security for Malaysians to save up for their retirement by providing retirement benefits for members through the mandatory contribution of two parties. The two contributions come from a portion of an employee’s salary and employer’s contribution on behalf of their workers.
In this case, the EPF scheme will deduct 11% from the employer’s salary. Meanwhile, the employer needs to fund at least 12% of employee’s salary to the savings (13% if salary is below RM5,000).
Some of the benefits EPF offers include a guaranteed annual minimum dividend earnings of 2.5%. Historically, however, the average is 5% to 6% for the past 10 years.
They also have tax exemptions. Basically, members contributions are tax deductible up to a maximum of RM6,000 per year which is inclusive of their life insurance premium.
The first account is Akaun 1, which stores 70% of the members’ monthly contribution. Since most of the savings are kept here, members can only withdraw money during retirement. However, if their savings exceed at least RM 5,000, members can withdraw 20% from the excess savings. The purpose of the withdrawal is to invest it through the Ministry of Finance approved Fund Management Institutions (FMI).
The second sub account is Akaun 2, which is the rest of the 30% of the members’ monthly contribution. Withdrawals is only permitted for down payments or loan settlements for a member’s first house, finances for education and medical expenses, or Hajj pilgrimage.
Another account available under EPF is Akaun 55. This is where they combine the savings in Account 1 and Account 2 and put into this account once members turn 55. Members can make withdrawals and have access to savings in Account 55 anytime. They are also able to perform a lump sum withdrawal, monthly withdrawals or partial withdrawal.
Last but not least is the Akaun Emas, an account for EPF members who continue to work beyond the age of 55. Monthly contributions between the age of 55 – 60 will be allocated under this account. Members cannot access savings in Akaun Emas until they reach age 60. And upon reaching 60, all savings will be consolidated into this single account. Only then will the members have full access to the savings in Akaun Emas to make full withdrawals, or even partial withdrawals.
While the government fully runs EPF, PRS is a privately-owned long-term investment scheme for Malaysians to accumulate retirement savings over the long-term. Unlike EPF, PRS is voluntary which means you can contribute as little or as much as you want. That also means there’s no pressure to allocate a part of your salary each month at a fixed rate.
Some of the PRS providers approved by the Securities Commission includes AmInvestment Management Sdn Bhd, AIA Pension and Asset Management Sdn Bhd, CIMB-Principal Asset Management Berhad, and Kenanga Investors Berhad.
In terms of benefits, PRS also provides tax relief up to RM3,000 per assessment year. Although that is only half of EPF’s.
As a voluntary private retirement scheme, PRS offers two advantages. For one, maximum security. Members will have the freedom to decide on the amount of regular contributions they wish to make. The next advantage is that members have a choice of retirement funds that they can invest in based on their retirement needs, financial goals and risk appetite.
Both are respectively distributed according to the same 70:30 ratio. The amount in Sub-account A can be withdrawn upon retirement age or valid circumstances such as serious illness; while Sub-account B permits a once-a-year withdrawal.
Unlike EPF, the PRS schemes does not guarantee a minimum return since it is privately run by financial institutions. It can also be exposed to general investment risks as well as specific risks based on your portfolio.
It is expected that more than 10% of the population in Malaysia will be 65 years or older by 2020, which is next year. Coupling with the effect of inflation which is targeted at a range between 2% and 4%, the question whether savings are enough for retirement will only become more hotly contested.
In today’s economy, it’s impossible to solely depend on EPF for your retirement savings. EPF recently revised its target minimum savings (the recommended amount to have in your EPF at the age of 55 to see you through 20 years of retirement) from RM196,800 to RM228,000. That means active contribution to your EPF alone may not be sufficient for achieving your retirement goal.
Before making your PRS contribution, do account various factors. For instance, your age, personal and household income, risk tolerance, and retirement objectives. Also important to bear in mind the cost of living and inflation in setting your retirement goals. Do think long-term as well.
PRS was launched to provide a well regulated and affordable voluntary private retirement schemes. This is to encourage the public to save more for their retirement. If you’re looking for an extra avenue to build your retirement nest egg, having an additional PRS account is something you should consider.
Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page.