EPF and PRS? Where is Your Retirement Income Coming From?

Updated 19 Jan 2018 – By Loanstreet


As the name suggests, Private Retirement Schemes (PRS) are managed by private companies, as opposed to Employment Provision Funds (EPF) which are wholly owned by the government. The objectives of both are identical: save money today and benefit from interest receivables and eventually withdraw the fund upon retirement.

Many of us have a large weightage of total savings in EPF accounts. What makes most experts intrigued is, despite the exceptionally high saving rates Malaysians  generally do not save enough to sustain their living standard after retirement.

It is expected that more than 10% of the population in Malaysia will be 65 years or older by 2020. 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.

The minimum retirement age in Malaysia is 60. Still, many people in the workforce aspire to retire at 55. Does that mean Malaysians have planned well ahead of retirement and accumulated enough savings for the old age? Most would say no. Taking into account both charts shown above, one takeaway is clear: saving more is not enough. The doctrine of a good life after retirement is to save wisely.

Why PRS ?

How many times have you stared feebly at your bank balance and wondered how long it took to increase your bank balance by a little? What would you do if you have spare cash on hand every month? Forget about mutual funds, unit trusts or even private equities that could possibly generate higher returns during bull markets. What we are discussing here is an alternative to your EPF, or solely a mechanism that generates interest in itself, and pays back in the form of monthly or annual stipend after retirement.

To further justify the reason of allocating your money in PRS, we introduce you some restrictions of EPF on voluntary contribution:

  1. Limitation on self-contribution: maximum RM60,000 per annum
  2. Members cannot pick the best-suited portfolio

The benefits of putting money in PRS may not be obvious before we show you several distinctive characteristics of PRS.

  1. More creative withdrawal options catered to clients’ need
  2. Individual tax relief of up to RM3,000 per year on top of your EPF’s tax relief
  3. Wide spectrum of funds available according to investor’s risk appetite

Who are the PRS providers?

  • Affin Hwang Asset Management Berhad
  • AIA Pension and Asset Management Sdn. Bhd.
  • AmInvestment Services Berhad
  • CIMB-Principal Asset Management Berhad
  • Kenanga Investors Berhad
  • Manulife Asset Management Services Berhad
  • Public Mutual Berhad
  • RHB Asset Management Sdn. Bhd.

How many PRS funds can you invest in?

You can put your money in as many PRS accounts as there are available in the market. So, preparation is vital to determine which funds suit your philosophy the most. The default options according to your age grouping are Growth fund, Moderate funds and Conservative funds. Otherwise, if you are choosing from a range of PRS funds, look for consistent performances and smaller volatility of returns or dividends. Wide understanding is vital; higher returns do not come at no cost.

Can employers participate? What are the benefits?

Yes. A maximum 19% tax deduction on the contribution on top of EPF statutory rate is given to incentivize the employers to contribute to employees’ PRS accounts.

PRS Youth

Readers, if you age will not reach 31 year-old by 2018, please listen up. Our government is giving RM500 to your PRS account provided that you can accumulate a gross contribution totaling RM1,000 (inclusive of fees and charges) within a year. Nonetheless, the incentive will be valid only if you have contributed RM1,000 in a single fund. That said, if you have two PRS accounts with RM500 invested in each of them within a year, you will not be qualified for the incentive. This incentive has been valid from 2014 and will end in 2018, but your account will stay open until you retire.

PRS vs EPF comparison

EPF and PRS? Where is Your Retirement Income Coming From?

Source: Various

So, here comes the hard fact. How have PRS funds performed so far?

PRS’s performance

Source: Morningstar

EPF’s performance

Source: Employees Provident Fund

The above comparison does not reveal the “right choices” of funds as consistent performances are more important than merely looking at a one-year return. Also, the returns from PRS and EPF funds shown above are not directly comparable because EPF is not a publicly-held fund and thus the latest one-year return is not disclosable.

Nonetheless, it clarifies the doubt: putting all eggs in one basket is risky. For example, if you are to choose from funds other than the default options, randomly picking an “other” fund from one of the eight providers could either result in high positive return or negative return.

For more information about EPF have a read through our article '7 Things You Can Use Your EPF For'.

Conclusion

This article is a wakeup call for readers to start thinking about how important it is to invest smartly. Retirement is not all about saving. In this regard, PRS is just one of the investment tools to grow your wealth, let alone other investment products which are inherently riskier but more profitable. Keep in mind that diversification is key to alleviate product-specific risks. Make the smart choice today to enjoy carefree retirement.

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