Much concern has been raised about insufficient retirement funds. As reported by The Sunday Times just last week (the same issue was highlighted last year), the majority of EPF savers had less than RM50,000 in their retirement fund leaving them with only RM208 per month spending for retirement. This forces many to delay retirement or find alternate means of income well into old age.
The Private Retirement Scheme (PRS) was introduced in 2012, and sought to encourage people to build their retirement income in another way beyond EPF. If you've been thinking of contributing; allow us to give you a quick guide to the PRS.
What is the Private Retirement Scheme (PRS)?
The PRS is a defined contribution pension scheme which allows people to voluntarily contribute into an investment vehicle for the purposes of building up their retirement fund. This is especially useful for those who wish to grow their retirement fund and invest but aren't savvy in the area of investment.
However, don't mistake this as a substitution for the EPF scheme. The PRS works as an add-on rather than relying on EPF alone.
Having a voluntary scheme in addition to the EPF allows private company employees and self-employed persons to voluntarily diversify their contributions towards their retirement.
If you're wondering who actually manages the funds and investments behind the PRS; take heart in knowing that they are actually real investment companies well-versed in the area of building retirement pots. They are collectively called PRS Providers but are made up of a few different entities. Approved by the PRS administrators, these fund management firms manage the funds received while also managing the investments.
To know who manages your funds, here are eight approved PRS Providers:
- AmInvestment Management Sdn Bhd;
- AIA Pension and Asset Management Sdn. Bhd
- CIMB-Principal Asset Management Berhad
- Affin Hwang Asset Management Berhad
- Manulife Asset Management Services Berhad
- Public Mutual Berhad
- RHB Asset Management Berhad
- Kenanga Investors Berhad
Unlike the EPF system, you're free to invest any amount, whenever you please. That means there's no pressure to allocate a part of your salary each month at a fixed rate. It largely depends on how much you are willing to invest. If you're unsure of how much to contribute, PPA site illustrates the amount of contribution you can make to reach particular goals.
There is no such thing as risk-free investment. However, the PRS enables you to customise your investments choices based on your risk appetite but be aware that this will affect your expected return.
If you're interested in investing in more than one PRS Provider, you will have the freedom to choose more than one fund as offered by the different PRS Providers.
Alternatively, a default option is made available for members who select their PRS Provider but do not specify a fund option. By default, investment funds assigned to you are based on different age groups. For instance, aggressive funds for younger investors and conservative funds for older investors.
You are also allowed to switch funds within the PRS system at any time, or change to another PRS Provider once a year, subject to terms imposed by the PRS Provider. Do bare in mind that the first transfer is permitted a year after your first contribution.
Unlike the EPF's statutory minimum dividend rate of 2.5% p.a., the PRS does not have any minimum dividend. In fact, the returns depend on market performance which mean it can go up or down. In the event of non-performing investments, you risk receiving no pay-out or worse, investment values may plunge.
To fully reap the benefits of PRS, it appears that some amount of market know-how will be beneficial as you will be able to actively decide which fund to contribute to and when. You will also be in a better position to know when to pull out of non-performing investments.
Besides being an additional retirement pot; the PRS is also on the list of tax reliefs, meaning your contribution will count to saving you money on your taxes each year. You will be able to deduct up to RM3,000 from your taxable income, which will count towards your final tax payable. Earnings generated by the PRS funds will also be exempted from tax charges.
Similar to the EPF system, contributions are divided into two sub-accounts, which are divided 70/30 in Sub-Account A and Sub-Account B respectively. Upon reaching retirement age (currently 55 years); or in the case of death or emigration, the PRS fund can be withdrawn. If you wish to make partial withdrawal for pre-retirement (before the age of 55), withdrawals can be made from Sub-Account B once a year. But you'll be penalised with an 8% tax from the withdrawal amount.
How do I become a member of a PRS?
To get started, you will need to set up a PPA account by filling up an application form can be obtained from any PRS Provider or from the website of the PPA. Once you have a fund selection in mind, you'll have to inform a PRS Provider.
Can employers make voluntary PRS contributions for their Employees?
Sure they can. In fact it works well for both employers and employees. Employers can invest in a PRS fund as a private pension for their employees together with recruitment benefit like Medical Insurance - a great way to attract loyal employees. On top of that, employers will also receive tax exemption for contributions for up to 19% of an employee's base salary.
Does this sound like the kind of scheme you'd want? Let us know on the comment section below.