Private Retirement Scheme: Things You Should Know

Key Points

1. PRS works as a complement to your compulsory EPF savings.
2. PRS is a long-term savings plan which allows you to contribute and build up your retirement fund.
3. Planning to have a better life after retirement? Consider PRS!

The EPF is a major source of retirement planning for many Malaysians, but it’s not enough. With young people prioritizing other things like school and career advancement over saving money in their accounts, most will never have enough capital to last them throughout old age. Due to the economic crisis, the Malaysian government allowed the citizen to withdraw up to RM10,000 from EPF early this year. This means that your EPF savings will be lesser when you grow older. It might also cause inflation in the future of Malaysia’s economy.

With such skyrocketing living costs coupled with stagnant wage growth, the maintenance of financial stability has become a significant concern for many people. Recent news about the current situation in Sri Lanka concerns Malaysians, as we might face the same bankruptcy issue. Besides, the Malaysian Ringgit has dropped to the lowest rate since 2016. The currency is poised to depreciate further and probably breach the 4.50 level against the US dollar.

Therefore, we should have another plan to sustain our retirement life later. The Private Retirement Scheme was introduced in 2012 to combat the lack of retirement savings. If you’ve been thinking about contributing, this article is what you need to know about PRS!

What is the Private Retirement Scheme?

Private Retirement Scheme, known as ‘PRS’ for short, is a long-term savings plan which allows you to voluntarily contribute and build up your retirement fund. The Private Pension Administrator Malaysia (PPA) is the central administrator of the private retirement scheme, and they are responsible for managing your account and facilitating transactions.

This is an excellent way for investors to start investing and grow their retirement fund without much investment knowledge. Individuals can choose from various retirement funds, depending on their needs and goals.

However, some might mismatch PRS as a substitute for the EPF scheme. Both are similar yet different, which we will mention later. PRS seeks to enable all Malaysians, whether they are employed or self-employed, with the opportunity to supplement their retirement savings in a well-structured and regulated environment.

Differences between PRS and EPF

Many people mostly confuse PRS as a replacement for EPF. Instead, it’s an additional scheme for you to increase your savings. Unlike EPF, where you are mandatory to contribute, you can choose to contribute voluntarily for PRS.

PRS offers a way for individuals to build their own fund that they can draw from when they retire. This means no more relying on EPF alone. Other than that, this also allows private employees and self-employed persons the opportunity for continued diversification into retirement savings.

Look at the table below to understand more:

Pros and cons of PRS

Here are some advantages of investing in the private retirement scheme.

1. Complement to EPF

You have an alternative option to save more retirement funds rather than relying on EPF only.

2. Enjoy tax relief

Invest in PRS and get up to RM3,000 worth of tax relief. Depending on your tax bracket, this could save you up to RM900 in tax.

3. Low invest barrier

Depending on providers, you can invest as little or more than RM100 in the fund. This is an easy way to diversify your money through unit trust funds.

Nothing is perfect; there are disadvantages too.

1. Risk of losing money

Unlike EPF, investing in private retirement schemes did not guarantee returns. Depending on the funds you choose, you might end up losing money.

2. Fees to pay

You could end up paying an upfront sales charge of as high as 3% and a management fee of 5% needed annually. These fees will seriously cut your profits over time.

PRS providers in Malaysia

PRS providers must be approved by the Securities Commission, and all PRS activities are administered by the Private Pension Administrator Malaysia (PPA). There are 8 PRS providers in Malaysia, which are:

• 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
• Kenanga Investors Berhad
• RHB Asset Management Berhad

Types of PRS funds in Malaysia

Investing your money for retirement should be easy, and the PRS does that with its default option of core funds. You can have your funds invested in default core investments based on the age you enter, and you can decide to opt for the auto glide path or choose manually.

For the auto glide path, the PRS fund manager will automatically switch your funds from a higher-risk asset allocation to a lower-risk asset as you approach retirement. This makes it easy for you to manage risks over time, knowing that the system has already done most of the work.

You can invest in any of the non-core funds, but it’s important to remember that their risk and return profiles may not match your age group.

There are three types of core funds (based on age selection), which are:

1. Growth fund

This core fund focuses on growing your portfolio and is suitable for ages 45 and below to invest in. It invests mainly in growth-seeking assets, which take higher risks for higher returns. The asset allocation is up to 70% in equity and 30% in debentures or fixed income.

2. Moderate fund

This core fund is more focusing on growing the portfolio whilst seeking income. It is more suitable for the age range between 45 to 54 years old. There is a balance between risk and balance as it only takes the appropriate risk. The asset allocation is up to 60% in equity and 40% in debentures or fixed income.

3. Conservative fund

The focus is on generating income steadily (conserving capital) that will allow the portfolio to be utilized. It is suitable for 55 years old and above. The risks are the lowest among other core funds, as it will only focus on income-generating assets. The asset allocation is up to a maximum of 20% in equity, and 80% in debentures or fixed income, while 20% MUST BE in money market instruments.

Funds performance

It is essential to have a plan for your retirement. Volatile markets can make it difficult in the short term, but saving for your retirement is a long-term game. You might want to understand how PRS funds have performed.

Investors should always be mindful of the risk involved when investing their money. The past performance of an investment doesn’t guarantee future returns, so it should only serve as a guide for your retirement planning needs. Click here to check the past performance (latest update June 2022).

Fees to apply in PRS

There will be fees to apply just like any other mutual fund or unit trust, which are:

• Sales charges

There will be up to 3% upfront charges to pay when investing in this product or service.

• Annual management fee

You pay an annual fee to the professional fund manager, subtracted from your fund value, from 1% to 5%.

• Switching fee

You should expect to pay a fee if you want your money moved from one fund type into another.

How do I contribute to PRS?

To get started, there are three ways to choose:

1. Sign up through any of the PRS provider’s websites or branches
2. Set up a PPA account from the PPA website
3. Contribute to PRS funds of your choice via PRS Online

You must pay a one-time fee of RM10 to open an account. Depending on your provider, the initial contribution should start from RM100.

How do I withdraw from PRS?

When you contribute to PRS, 70% goes into Sub-Account A, while 30% is set aside for Sub-Account B. Contact your PRS provider or check their online portal to withdraw your money. However, depending on how old you are, the process might be varied. If you are aged 55 and above, you can choose to withdraw partially or fully without penalty.

However, if you are below 55, you can only withdraw all your money from Sub-Account A if you intend to depart from Malaysia permanently. Otherwise, you can withdraw from Sub-Account B only. You are subject to an 8% tax penalty if your withdrawal did not relate to leaving the country or covering housing and healthcare expenses.

Should I invest in the Private Retirement Scheme?

We should all be worried about our society’s lack of financial literacy. It’s very dangerous for people who aren’t saving enough money to live off their retirement funds and will probably end up poor once they retire. A recent survey (2021) found that 55% of the population aged 35 years old or below had not started preparing themselves financially.

According to the Securities Commission Malaysia (SC), most Malaysian youths have not been adequately introduced to financial literacy and capital market products. This leads to difficulty with financial planning among them. Moreover, a survey showed that most youths in Malaysia spent their income on daily expenses and debt repaying, leaving them with not much left for savings or investment.

Therefore, if you plan to have a better life after retirement, you should consider investing in a private retirement scheme. Not only that, you didn’t need to rely only on EPF, but also a tax relief opportunity for your current life.

Verdict

You now know more about PRS and the benefits it can offer you. The process of choosing which PRS provider and their corresponding fund you want is not an easy task. Remember to do market research before making this decision to make your investment successful! Click here if you need to understand more about other types of investment in Malaysia.

Related: Top 5 Low-Risk Investments in Malaysia | Investment-Linked Policy: How Does It Work?