EPF 8% vs 11%: Which is the Best Choice for You?

Updated 14 Sep 2016 – By Loanstreet


8% vs 11%. These two numbers have been on the minds of most working Malaysians in recent times, and for good reason. With the announcement of the new default EPF contribution rate in the revised 2016 budget, everyone is scrambling to find out whether they should stick with the new rate or opt to go back to the original rate. Employer contribution to EPF remains the same, however that is not true of your own personal EPF contribution! In this article we will try to give you the information you’ll need to make the right decision for yourself!

So it goes without saying that sticking with the new 8% EPF rate will leave you with additional disposable income. More money in your pocket, more money to throw at things in stores, or at least that’s what the government hopes, as the stated reason for this change in the budget is to revitalize consumer spending in the Malaysian economy. That’s why the default contribution rate has been set at 8% from 1 March 2016 until 31 December 2017.

The following are the pros and cons of both options:

8% EPF Contribution

Pros

a) You will receive a higher disposable income, which means in the short run you will have more cash to buy necessities or pay off debts. Of course, the amount of extra cash you’ll receive will be based on your current monthly salary, so you should take your personal situation into account when deciding whether this amount is significant or not.


b) The extra cash made available to Malaysians will help to stimulate the economy and revitalize GDP. With the weak performance of the Malaysian Ringgit, low oil prices, and poor investment climate, this measure will help stabilize the economy to prevent it from deteriorating further (an indirect benefit, perhaps, but no one wins if the economy tanks).

Cons

a) Extra cash on hand also means less cash in your EPF account earning dividends. Take into account the opportunity cost (the amount of potential dividend earnings) you will forego if you choose to stick with the 8% contribution rate. Do you really need the extra cash now, or can you survive without it? Would you rather gain in the short term or the long term?


b) At lower income brackets, under-utilization of EPF relief may occur if the amount of your contribution is less than RM6,000. However, do note that EPF and Life Insurance premiums combine to form that RM6,000 tax relief, so depending on your situation, the increase in tax may be quite negligible. Assuming no life insurance premiums, a monthly salary of RM6,250 is required to fully utilize the RM6,000 EPF tax relief.

11% EPF Contribution

Pros

a) Annual compounding dividend means that you’ll eventually earn more from the extra 3% contribution when you withdraw your EPF funds at retirement. It goes without saying that this option is better in the long run.

b) It is also notable that with the 11% EPF contribution, it is much easier to maximize the usage of EPF tax relief. The minimum monthly salary required for this is only RM4,550.

Cons

a) KWSP announced a 6.40% dividend for 2015. However, the dividends for 2016 and beyond is expected to be much lower, with experts predicting it to be somewhere between 4.5% and 6% instead. If you can find an investment instrument with a higher yield than 6%, you may be better off putting the extra cash you’ll get from choosing the 8% contribution rate into that.


b) More cash in your EPF means less disposable income for you to use in the short run. If the amount is insignificant to you or you believe that you can survive without it, then it won’t be as much of a problem, but if you are desperate for cash, perhaps the 8% EPF contribution will be useful to you.

Opportunity Cost Table

The table below shows the additional monthly income and potential dividend gains that you will forego (opportunity cost) if you choose to stick with the 8% contribution rate. Do note that the calculations are made on the unrealistic assumption that annual dividends will remain constant at 4.5% for the next 30 years, which is very pessimistic. This table only serves to illustrate the opportunity cost you may bear by sticking to 8% contribution.

Opportunity Cost Table

Conclusion

So 8% or 11%? Which contribution rate should you choose? If you opt to stay with 8%, you will have a bit of extra cash to use monthly, however you may lose out in long term gains. You may also find it difficult to maximize your EPF relief unless you perform proper tax planning. A good way to avoid the disadvantage of the 8% contribution rate is to invest the extra cash into an interest-yielding financial instrument that can provide a higher yield than EPF annual dividends. 8% will be the default contribution rate for the next 2 years, so if you decide to go with it, you don’t need to do anything.

However, in general, if you can survive without the extra cash or if you do not have the confidence to invest your money into a different financial instrument, it is perfectly fine for you to go back to the original 11% contribution rate. The 11% rate brings with it higher potential gains in the long run, and as such it is a safe and highly advisable option for most Malaysians. If you decide to go with this option, you’ll have to download and fill up the KWSP 17A Khas 2016 form which can be found here. You’ll have to submit the complete form to your employer, who will in turn forward it to KWSP to complete the process.

Ultimately, you should choose the contribution rate that best suits your situation, and we hope this article has given you some of the information you need to make the best decision for yourself.

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