Eye on retirement schemes

It is no secret that many Malaysians tend to live in the moment, spending what they can now instead of saving for the future.

In fact, it is alarming that the Employee’s Provident Fund (EPF) reported that 68 per cent of EPF members aged 54 and above had savings of less than RM50,000 – a figure that is expected to not even last for more than five years for the average retiree.

The federal statutory body also reported that 70 per cent of their members who withdraw their funds at age 55 use up their savings in less than a decade after retiring, leaving a huge chunk of our retirees unable to provide for themselves.

And then there are those who are not even EPF members as it is estimated that only 48 per cent of our working force are active EPF account holders.

Of course, a small portion of these with no active EPF accounts are civil servants who qualify for pensions and contribute to other pension funds such as Kumpulan Wang Persaraan (KWAP) and Lembaga Tabung Angkatan Tentera (LTAT).

However, the fact remains that a significant portion of our work force may have little to no preparation for their retirement at all.

Casual employees in our hospitality and F&B industries and self-employed individuals like freelancers and agriculture workers are often the most suspect to this dire issue facing our nation’s ageing workforce.

Many causes to unhealthy spending habits

Speaking to industry specialists on this issue, it was highlighted that the issue might stem from a lack of financial education and awareness in our public and our youths.

Touching on this subject, Wilfred Lim, a CPF trainer and lecturer said as financial management is not taught from young, most do not have any clue on how to manage to outflow of their money and cannot see the outcome of their spending as it is natural for us to spend what we have as spending creates pleasure.

“However, this is a slippery slope as once we get into certain level and pattern of spending, it is difficult to get out,” he said to BizHive Weekly.

“In an economic environment where income increment is lower than inflation, we will be trapped into that situation where we will have less and less money to pay for our lifestyle and commitments.

“Therefore, money management must be taught from young and prudent spending habit must be developed during the growing up years. By the age of 20, spending habits will have formed and it is hard to change without great determination. And this determination needs to be fuelled by the realisation of the consequences of our spending behaviour.”

This is why financial planners have crucial roles in helping people to manage the out flow of their money, Lim said, advising them on how to change their spending pattern and maintain a healthy cash flow.

“This step requires clients to records their expenses so that the financial planner can have an insight of their money management behaviour and advise them accordingly,” he added.

“After all, financial planning is about managing a person wealth and outflow of money with the objective to be financially healthy, free of financial stress so that they can focus on what really matter to them such as growing his career and talents and to live a meaningful and fulfilling life.”

The rise of consumerism and low wages

Additionally, Lee Khee Chuan, a licensed Financial Adviser representative with StandardFA (East Malaysia), speculated that our unhealthy spending habits and attitudes has also been very much influenced by the rising trend of consumerism in recent years.

“Because of consumer advertising on the internet and social media coupled with the increasing popularity of online shopping and digital payments, especially among the millennial and generation Z, people do seem to be saving less as they are constantly drawn to spending.

“Of course, the general income level is also an issue as it have no seen much improvement and with the increasing cost of living, it is also much harder for people to save,” he said.

How do you plan for retirement?

From both Lim’s and Lee’s input, the little financial education we have for our public may have already laden them with issues of unhealthy spending, so the notion of retirement planning might be a faraway notion for many still, especially our freshly graduated 20 year olds who still have a good 40 odd years till their eventual retirement.

But even if they do recognise the importance of retirement planning, many are still left scratching their heads on what would be the best ways for them to achieve their retirement goals.

Speaking on this issue, Linda Chan, who is a registered representative of StandardFA, said that in order for Malaysians to achieve their retirement goals, they need to start planning and taking action early on into their careers.

“When one realises the importance of retirement planning, they usually finds that there are only a few years left and will be miserable as they are unable to retire with their desired lifestyle. Malaysians should plan well and early enough, or else retirement will be a nightmare.

“To avoid this, we have to develop a clear understanding of our financial position now and into the future. To achieve this, we have to answer the following questions, ‘When can I retire?’, ‘How much do I need?’, ‘Will I run out of money?’, and ‘What investments should I consider?’.”

How much do you actually need by retirement?

One of the biggest questions that everyone is keen on figuring out is how much money do we actually need to have accumulated by retirement? And the simple answer is that the amount will be different for everyone as we all have different lifestyles and spending habits out there.

For example, a person who plans on retiring in densely populated urban areas like KL might find their retirement needs much higher compared to those looking to retire in quiet rural areas with a lower cost of living.

“It depends on a person’s lifestyle, monthly expenses as well as the life expectancy/number of years after retirement. For example, if a person has a monthly expenses of RM3,000 and expects to live 25 years after retirement, the person needs to have about RM900,000.

“This is because in one year, the person needs RM36,000 and multiply that by 25 years, the person would end up needing RM900,000 for their retirement,” explained Adrian Lim, a licensed consultant from Areca Capital, a licensed fund manager.

Not just savings, but generation of assets

For Malaysians, hearing such a high figure might be daunting as many of us already struggle getting by in life after taking out payments to our home and car loans from our monthly wages.

To this end, Lim guided that retirement planning is not just about saving money, but is also about generating assets.

“In an economic environment where income growth is low and inflation is high, it would be better for us to focus on creating and growing income generating assets,” he said.

Besides the EPF, there are still many retirement funding/investment methods out there available to us in the private sector, we have the government backed Private Retirement Scheme (PRS), deferred annuity, unit trust investment, and mutual funds.

All these funding methods are all usually recommended as supplementary for those wanting to plan their retirements and would suit different people depending on their risk appetite and the features that they are looking for in a retirement fund.

“It would be great if people can increase their saving levels as much as possible by saving in other various supplementary scheme out there, but they will need to be mindful of the risk-reward relationship. The higher the possible return, the higher the risk.”

However, one thing that most of commentators and experts recommended is that money in our EPF accounts should be kept inside the account and only withdrawn when they need it, but never all of it.

“This is due to the security of capital that EPF provides and relatively high return compares to other secure investment like bonds and FDs,” Lim said.

“But if a retiree wanted to take our their EPF savings for investment elsewhere, Lee advocated that they needed to be mindful to invest in instruments that can outperform the EPF dividend rate, suggesting that a portion of it could be invested in equity funds using the value average method as an example.”

It is clear that preparing for retirement is a crucial aspect of our financial plans that we shouldn’t ignore, but other than EPF, what other options are out there for us to consider?

Of course, investments for the future can be anything – they can be property, they can be direct equity, fixed deposits, mutual funds. There is no set rule on what investments can or cannot be.

But with all investments, there is always some degree of risk involved as there is no such thing as a risk-free investment.

Many are left hanging beyond this as some investors might be extremely risk adverse while some might not have the capabilities of investing themselves.

This is where the PRS comes into play, as it acts as another avenue for investors to accumulate funds for retirement via regular contribution.

According to Ismitz Matthew De Alwis the chief executive officer (CEO) of Kenanga Investors Bhd (KIB), PRS products are meant to complement existing retirement savings and offer investors a choice of providers and self-selected funds that correlate to our appetite of risk.

“Investors will be able to invest according to their compatible risk appetite; which are either conservative, moderate or growth so that their choice corresponds with their financial goals and current financial situation,” he told BizHive Weekly.

“But as with all investment products, PRS investments come with a certain degree of risk. Though PRS funds are not capital protected; with proper portfolio planning and asset allocation over a longer period of time, it is expected to deliver the returns worthy of comparison with EPF,” he said, adding that investors should read and understand the disclosure document and product highlights sheet to understand the risks involved before investing in PRS.

While we can’t say for certain that this is the case for all PRS providers and their products, Ismitz has been kind enough to share with us the growth rates of Kenanga’s OnePRS products, that indicate the funds have indeed been performing well for periods of three and five years against benchmark rates.

“(This) is what long-term investment savings are about,” he quipped.

Admirable growth rates aside, what actually makes PRS different from all the other investment products available in Malaysia?

“Unlike other investment products in the market, the PRS was introduced by the Government as an initiative specifically to accelerate one’s long-term retirement savings.

“It is a regulated capital market services activity that comes under the supervision of the Securities Commission (SC) Malaysia, who ensure the proper functioning of the PRS industry and investor protection through the regulation from four intermediaries,” Ismitz explained.

The four intermediaries that help regulate the PRS industry are: the Private Pension Administrator Malaysia (PPA) that acts as a resources centre for any information relating to the PRS industry and a record keeper of all transaction of monies paid or received; SC licensed and approved PRS Providers that offer a range of PRS retirement funds for members to choose to invest in; independent Scheme Trustees that safeguard members’ contributions under a trust; and PRS distributors and consultants that enter into agreement with PRS providers to market and distribute their PRS products.

Happier employees, cost savings and tax deductions?

Another great benefit about the PRS that both employers and employees can enjoy is that employers are able to make voluntary PRS contributions for their employees.

Now, now, while it might sound like an added business cost to have to contribute to another retirement fund for your employees, in actuality, it just might be a great recruitment benefit and cost saver for all you business owners out there.

By investing in a PRS fund as a private pension for your company, your organisation would easily standout from the rest of your competitors as a great place to work, attracting quality employees and maintaining employee satisfaction and loyalty.

“Additionally, using PRS as the company’s own retirement benefit program may cut down on unnecessary administrative resources which help the employer become more cost efficient. PRS also empowers employees to determine their own financial well-being which gives them a sense of security and job satisfaction which ultimately enhances their productivity,” Ismitz added.

An added bonus is that employers that are contributing to PRS on behalf of their employees can enjoy tax deductions on their contributions that come above the EPF statutory rate, which is up to 19 per cent of the contribution.

Investors on the other hand, get to enjoy personal tax reliefs of up to RM3,000 a year.

PRS Q&A with Ismitz Matthew De Alwis, Kenanga Investors CEO

QUESTION: Can members change schemes or make a withdrawal and close their PRS accounts before its maturity date?

ANSWER: Yes. Investors can change schemes within Kenanga OnePRS or to other PRS providers. Pre-retirement withdrawals from sub-account B can only be done after one year has lapsed from the date of the first contribution to any fund within the Scheme, and subsequent pre-retirement withdrawals from sub-account B may be requested via an application to the PPA once every year.

The PRS Provider will deduct 8 per cent tax penalty on the withdrawal amount which is imposed by the Inland Revenue Board of Malaysia for pre-retirement withdrawal from sub-account B before making payment to investors, as PRS contributers may claim tax-relief annually of up to RM3,000.

The tax penalty would not apply for pre-retirement withdrawals due to death, permanent departure of an investor from Malaysia or permanent total disablement, serious disease or mental disability.

However, requests for full withdrawals (from both Sub-account A and Sub-account B) can be done in the following circumstances: (a) the investor has reached the retirement age; (b) following the death of the investor; or (c) due to permanent departure of the investor from Malaysia.

QUESTION: Do investors need to contribute every month to PRS? If so, what is the minimum or maximum amount possible to invest?

ANSWER: They can choose to have a regular contribution monthly by way of standing instruction or choose to contribute whenever they wish to. The minimum initial contribution is RM1,000 per fund for a lump sum, and regular contribution plan is at RM100 per fund.

Minimum additional contribution is at RM100 per fund.For PRS Online, minimum initial contribution is RM100 and minimum additional contribution is RM100 (fees and charges will apply).

QUESTION: What types of PRS products are being offered by Kenanga Investors?

ANSWER: Under the Kenanga OnePRS suite of product, we offer both conventional and Shariah options that are geared for investors with different risk appetites.

Lack of awareness

Even after seven years of its introduction back in 2012, there is still a handful of us out there who might not know what the PRS scheme is.

Attributing this to the possibility of low financial education in our young, Ismitz guides that he firmly believes that the message would be best received and internalised in our population when it is conveyed from a young age.

“This way, we (as a PRS provider) are able to connect with both parent and child from the beginning, which will also encourage more families to adopt PRS.

“As such, we are frequent collaborators with the PPA to run seminars nationwide in universities and colleges where young adults get to engage with professional experts on matters that relate to financial management and the PRS.

“We have been conducting seminars on PRS for the past three years together with PPA and other media partners for investors of all ages in areas such as Kuala Lumpur, Penang and Kuching to great success.

“Our recent award by Hong Kong-based Asia Asset Management’s 2019 Best of the Best Awards under Malaysia – Best Investor Education, strengthens our belief that we are on the right track in winning over the nation to accept PRS as a staple in financial products,” he shared.

Going forward, the Kenanga Investor CEO guides that their aim is to continue helping spread awareness of the PRS and the importance of retirement planning by ‘adding colours to your retirement’ which highlight the importance of being financially secured to live a colourful and vibrant life even in retirement years through PRS and other investment products.

“Therefore, we will be continuing our efforts in 2019 via on-ground activities, media (conventional and digital) and other forms of communications where possible. In 2018, we received the go-ahead from the Securities Commission Malaysia to proceed with the offering of financial planning services which now enables our investors to access not just Kenanga Investors PRS funds, but also the six other providers in the industry.

“This gives investors great accessibility and convenience wherein he or she will be able to subscribe to 7 out of 8 approved PRS providers’ funds under one roof.”

The eight SC licensed and approved PRS providers are Kenanga Investors, AmInvestment Management Sdn Bhd, AIA Pension and Asset Management Sdn. Bhd, CIMB-Principal Asset Management Bhd, Affin Hwang Asset Management Bhd, Manulife Asset Management Services Berhad, Public Mutual Bhd, RHB Asset Management Bhd.

Last year, the total number of PRS members saw a growth of 38 per cent to 416,913 from 301,279 in 2017 while the total net asset value (NAV) for PRS funds rose 20 per cent to close the year at RM2.66 billion.

This is a pretty significant growth boost for the PRS in recent years and is mostly attributed to their launch of PRS Online which enables any Malaysian to sign up and save online, drawing in more interest from our tech savvy and time poor younger generations.