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Think You're Too Young To Think About Retirement?Think Again.

Updated 30 Jun 2015 – By Loanstreet


The subject of retirement may not be the most popular subject of discussion when it comes to the youth at large. After all, it can be a struggle to plan 5 years ahead, let alone 50 years down the line. But here’s the scary thing: according to the Employees Provident Fund (EPF), retirees use up an average of RM150, 000 of their EPF savings in the first three to five years of retirement. So unless you’re confident on making mega bucks by the time you hit 60, you might want to consider other alternatives to supplement your EPF contribution. In this article, we will be talking about the Private Retirement Scheme (PRS).

1. PRS Youth Incentive

Malaysians between the age of 20-30 years old are entitled to a one off contribution incentive of RM500 by the government into your PRS account. All you need to do is to contribute a total of RM1000 in a calendar year. It’s that simple. Take note that this incentive program is only effective until the end of 2018 (or until you reach the age of 31), so you might want to act fast. Also important to note, contributions made before 2 January 2014 will not be eligible for the incentive.

2. Flexible Investment Options

One of the perks PRS offers is its flexibility to cater to various risk appetites. PRS provides investors with the option to allocate their savings in appropriate funds to match their risk tolerance. For investors who prefer Syariah compliant investment choices, there are also various Islamic funds with similar risk categories available. This makes PRS an affordable and flexible investment option; you have freedom to decide when to contribute, how much to contribute, and you are free to invest in as many types of funds as you like.

3. Tax Savings

Another lucrative offer for PRS seekers is the Individual Tax Relief of up to RM3, 000 per year for the first 10 years, on top of their EPF tax relief. Depending on your income, your tax savings can be substantial. For example, if you fall under the 26% tax bracket and contributed a net amount of RM3000 or above, you can get the maximum tax relief of RM3,000 and enjoy a tax savings of RM780 (26% times RM3,000). Your earnings received from PRS funds are also tax exempted. Additionally, employers contributing to PRS on behalf of their employees are eligible for a tax deduction on their contributions above the EPF statutory rate, up to 19% of the contribution.

4. Cash Withdrawal from PRS Account?

Contributions that you make into the PRS are split into two sub-accounts, namely sub-account A (70%) and sub-account B (30%). The contributions are lumped together for investments but split into two sub-accounts for withdrawal purposes. You can make a full withdrawal when you reach age 55, emigrate or upon demise. You can however make a partial withdrawal before retirement, but only based on sub-account B. Do note that a tax penalty of 8% will be charged on the withdrawal amount. This is unlike the process of withdrawal from your EPF Account 2 where withdrawals can be made without penalty for. For more information about withdrawal of EPF, please see our article 7 Things You Can Use Your EPF For

5. Drawbacks?

While the perks to PRS remain an attractive feature, there are attributes to be aware of. When you compare the PRS to EPF which has a minimum dividend rate, PRS members might face non-dividend paying years or even worse, their investment NAV can go in the negative if the funds don’t perform well. Conversely, EPF continues to give a positive return of 2.5% to its members even despite poor investment results.

Conclusion

There has been a surge of interest when it comes to the topic of retirement savings/investments amongst the youth. Based on recent statistics from PPA, 25% of PRS member base are currently made up of individuals from the age group of 20 to 30 years as compared to 8% at the end of December 2013. However, the collective woes from retirees all around Malaysia still speaks volumes on the awareness of post retirement life.
Our take; It’s imperative to create a personal investment portfolio that can generate different kinds of returns rather than a savings account that erodes by inflation over time. To find out how EPF and PRS compare and the benefits of both have a read of our latest article EPF or PRS Where Is Your Retrement Income Coming From?

 

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