Time to look at PRS to complement EPF

The scheme may help Malaysians build an additional retirement nest egg to complement their other retirement scheme

by NUR HANANI AZMAN / pic credit: ppa.my

WOULD saving in the Private Retirement Scheme (PRS) be the answer to help the Employees Provident Fund (EPF) depositors to boost their retirement savings?

Private Pension Administrator Malaysia (PPA) CEO Husaini Hussin said by saving in PRS, Malaysians are building an additional retirement nest egg for themselves that would complement their mandatory retirement scheme.

He said with flexibility and choices, saving in PRS starts from as small as RM100 and contributors can select either the default option (age-based selection) or self-selected option funds from eight PRS providers.

“Additionally, as announced in Budget 2020, effective March 15, 2020, PRS members can make pre-retirement withdrawals from Sub Account B, which holds 30% of PRS members’ savings for the purposes of housing and healthcare without tax penalty.

“This move will help Malaysians to use a portion of their retirement savings for such needs,” he told The Malaysian Reserve (TMR).

PRS is a voluntary long-term savings and investment scheme designed to help Malaysians save more for retirement. With the regulatory framework developed by the Securities Commission Malaysia, PRS seeks to enhance choices available for all Malaysians whether employed or self-employed to supplement their retirement savings under a well-structured and regulated environment.

Studies and reports recommend having at least two-thirds (67%) of your last-drawn income to maintain one’s current living conditions when they retire.

To achieve the two-thirds benchmark for their retirement, PPA suggests saving a minimum of one-third (33%) of one’s monthly salary.

“For the majority of us in the private sector, the mandatory contributions constitute 23% (namely 11% from employees and minimum 12% employer contribution). Hence, one will need an additional 10% or more to make up the 1/3 or 33% savings for their retirement fund.

“PRS, in short, essentially complements the mandatory retirement scheme for those who save an additional 10% or more voluntarily in PRS,” Husaini added.

“The ‘take action’ thing to do is to push oneself to start small and when your income increases, you can raise your PRS contributions accordingly to the recommended 10% of your monthly salary. It is also important to exercise discipline and consistently save regularly to build your retirement savings,” he said.

Recently the Malaysian Financial Planning Council (MFPC) said it strongly encourages initiatives to encourage and offer incentives for long-term saving through the PRS as almost half of the EPF members had less than RM10,000 in their accounts.

“Of this total, 55% are Bumiputera. More worryingly, over 79% of the members (who have savings) of less than RM1,000 are also Bumiputera,” Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz had said.

IPPFA Sdn Bhd licensed financial planner Kuah Soo Yee said PRS is different from EPF as PRS is voluntary contribution and PRS return is non-guaranteed whereas EPF is mandatory contributions and EPF has a minimum guaranteed return of 2.5% per annum.

“To have consistent saving habits, it is recommended to have set up regular savings. In fact, PRS allows regular savings starting as low as RM100 per month. Small contributions over time will accumulate to a significant amount.

“However, the main challenges now are low income, stagnant income and low financial literacy among Malaysians. Covid-19 is not mainly to blame, but it does worsen the situation,” she told TMR.

Meanwhile, MFPC immediate past president Michael Kok said the creation of the PRS was to help more Malaysians save more money for their retirement.

“The government has offered tax relief of RM3,000, which has been extended to the year 2025 as a means of attracting more Malaysians to save but this will all be dependable on individuals’ financial behaviour,” he told TMR.

According to Kok, there are eight providers of the PRS and various funds for an individual to choose from including those preferring to opt for Shariah compliant funds to match an individual’s risk appetite and personal preferences of investment profile.

“The goal of any savings must be optimisation of resources. As such, even 1% additional returns will have a significant compounding effect for an individual in the longer term,” he explained.

Nevertheless, Kok said we would not see much of an uptick in PRS this year because many individuals are rebuilding their financial positions and based on PPA’s statistics, 80% of individuals contributing to PRS are contributors to the EPF.