The ‘soft’ launch of Malaysia’s voluntary Private Retirement Scheme (PRS) in July 2012 was greeted with much fanfare, but what is it exactly, and how can savers / investors / residents in Malaysia benefit? Find out in our article here!
NOTE: This is not an article about the Employers Provident Fund (EPF), which is Malaysia’s mandatory Private Retirement Scheme, for more on the EPF, see the full EPF Guide.
What is the Private Retirement Scheme (PRS)?
In short, the PRS is a defined contribution pension scheme which allows people (or their employers) to voluntarily contribute into an investment vehicle for the purposes of building up their retirement income.
In a Malaysian retirement framework, it is to be complemented with (and not a substitute for) the mandatory contributions made by both employee and employers to the EPF scheme.
Having a voluntary scheme in addition to the EPF also allows private company employees and self-employed persons to voluntarily contribute towards their retirement in a systematic way.
Similarities of PRS with the EPF:
1. Retirement Purpose: Both the EPF and PRS schemes are for building up a person’s retirement assets and income.
2. Tax Benefit: Tax relief is given for contributions to both schemes (up to RM6,000 a year for EPF, a seperate RM6,000 for PRS)
PRS vs EPF: A Summary
|Contribution Amount||No statutory minimum or maximum||Statutory minimum (11% Employee, 12-13% Employer)|
|Contribution Frequency||No statutory interval||Statutory Monthly Contribution|
|Contribution Paid to||Individual PRS Providers||EPF Directly|
|Yearly Personal Tax Relief||RM3,000||RM6,000|
|Partial Withdrawal||From Sub-Account B only, and 8% Tax Penalty||Account 2 only, specific reasons no penalty|
|Selection of Fund Investments||Freedom of Selection (among PRS Providers)||Freedom only on Partial Amount (EPF-MIS)|
|Dividend Policy||No statutory minimum (depends on Fund performance)||Minimum 2.5% p.a.|
The PRS Providers are fund management firms which are approved by the PRS administrators to manage the investment vehicles that contributions get paid into.
The eight PRS Providers approved (as of 25th April 2013) are:
- AmInvestment Management Sdn Bhd;
- AIA Pension and Asset Management Sdn. Bhd
- CIMB- Principal Asset Management Bhd
- Hwang Investment Management Berhad
- Manulife Asset Management Services Bhd (formerly known as Manulife Unit Trust Bhd)
- Public Mutual Bhd
- RHB Investment Management Bhd
- Kenanga Investors Bhd
PRS Features – Contributions, Investment, Benefits, Withdrawals
While the major points are covered in the summary above, in this section we will attempt to give a bit more detail about the specific features about the PRS.
Unlike the EPF, PRS contributions are not mandatory, and they can be made by either an individual or an employer. There is no statutory minimum amount (although PRS providers may specify a minimum amount as per their own internal investment policy) and no statutory time interval for contributions.
In the PRS scheme, individuals themselves have the autonomy to decide on fund investments (similar to the EPF-MIS scheme, but this time with the entirety of their contribution rather than a small amount), meaning that individuals can tailor their investments according to their own risk-return profile, whereas in the general EPF scheme they would have their retirement fund subject to a single set constraints and objectives which may not be suitable for everyone.
Members would have the option to contribute to more than one fund under a PRS or to contribute to more than one PRS, offered by different PRS Providers. The PPA provides quite a handy graphic to depict this process:
A default option would also be made available for members who select their PRS Provider but do not specify a fund option. The default option would cater for different age groups, with aggressive funds for younger investors and conservative funds for older investors.
Members would also have the option to switch funds within a PRS at any time, or change to another PRS Provider once a year subject to terms imposed by the PRS Provider. The first transfer can only be requested by a member one year after making the first contribution to any fund under the Scheme.
WARNING: Unlike the EPF’s statutory minimum dividend rate of 2.5% p.a., the PRS does not have one, and as it involves investments which can go up as well as down, and herein lies the biggest difference. If EPF investments don’t perform well, the EPF still has to give positive returns (this 2.5%) to their members, whereas PRS members may see non-dividend paying years or even worse, their pension investments going down in value, regardless of choice of risk-return profile of investment.
In the Malaysian Government’s Budget 2012, there is a specified tax relief of up to RM3,000 for 10 years beginning 2012 for contributions to the PRS. This is similar to the tax relief given to EPF contributions. For top tax rate payers, this amounts to a saving of RM780 a year!
A tax exemption is also given on all income generated by the PRS Funds.
Similarly to the EPF, contributions in the PRS are split into two types of sub-accounts (they are lumped together for investment purposes but the seperation is to identify the withdrawal status), 70% in Sub-Account A and 30% in Sub-Account B.
The entire fund in your PRS can be withdrawn upon reaching retirement age (currently 55 years), death or emigration.
Partial withdrawal for pre-retirement (prior to reaching 55 years of age) is allowed as well, but this can be only from Sub-Account B once a year and will incur an 8% tax penalty on the withdrawal amount. This is unlike the EPF Account 2 where withdrawals can be made without penalty for specific purposes (buying a house, paying for education etc.). For more on the EPF you may see our EPF Guide.
How do I become a member of a PRS?
According to the Private Pension Administrator (PPA), the appointed administrator of the scheme, to make contributions to PRS, you have to contact the PRS Provider of your choice directly and indicate your fund selection. At the same time or prior to contributing, you may open a PPA account by completing an account opening form that can be obtained from any PRS Provider or from the website of the PPA.
The PRS providers are yet to be able to accept applications for the PRS funds, they are given a 6 month grace period from time of approval to implement the relevant systems, this was April 2012 so we anticipate that people will be able to apply to contribute to PRS funds before the end of 2012.
While the system is not yet fully up and running (at the time of writing in July 2012), we anticipate that you will be able to see a summary of your PRS Providers and various investments through the PPA website after registering for a PPA account.
Benefits (if any) for Employers to make voluntary PRS contributions for their Employees?
The main benefits for employers are that they can offer additional recruitment incentives like Medical Insurance, whereby they can attract and retain top talent with a generous private pension contribution.
Employers will also get a tax exemption for contributions for up to 19% of employees base salary per year.
For a full and in depth review of the Malaysia Budget 2014, check out our Malaysia Budget 2014 Review – GST, Cost of Living, BR1M etc. article.
Alternatively, we covered the Malaysia Budget 2013 in similar fashion. Take a look at our Malaysia Budget 2013 – How the Budget Can Save You Money article.