Want to increase your retirement savings or just try to reduce your taxable income next year? Private pension plans can help you do both. Here’s what you need to know to get started.
What is a private pension plan (PRS)?
PRS is a voluntary investment program to help you save for your retirement. Under this program, you can invest in approved unit trust funds which are managed by PRS providers (Public Mutual, Kenanga, etc.).
The Private Pension Administrator Malaysia (PPA) is the central administrator of the PRS. This means that he is responsible for managing your account and facilitating transactions.
What is the difference between PRS and EPF?
The PRS is sometimes compared to the Employee Provident Fund (EPF) because they are two investment schemes that help you save for retirement. But PRS is not intended to replace EPF. Instead, it is a supplemental plan to help you increase your savings.
Here’s how PRS and EPF compare:
|Contribution||Voluntary||Mandatory for employees|
|Account structure||Sub-account A: 70% of the contribution
Sub-account B: 30% of the contribution
|Akaun 1: 70% of the contribution
Akaun 2: 30% contribution
|Tax relief||Up to RM3,000||Up to RM7,000 (civil servant) or RM4,000 (non-civil servant)|
|Age of withdrawal||55||55|
|Withdrawal before retirement||Maximum once a year from sub-account B unless you leave the country permanently; may incur an 8% tax penalty||From account 2 for approved expenses|
|Fresh||Selling costs up to 3%; annual management fees up to 5%||Nothing|
|Sharia Compliant||Yes, but depends on selection of unit trust funds||Yes, but it depends if you go for Simpanan Shariah|
What are the advantages and disadvantages of PRS?
- It’s like a second EPF. Contributing to the PRS can help you better prepare for retirement.
- Forced savings. If you are under 55, PRS funds cannot be easily withdrawn. Withdrawals are usually only limited to a portion of your funds and may be subject to an 8% tax, depending on the purpose of the withdrawal. This may sound limiting, but it can prevent you from digging into your retirement savings unnecessarily.
- Low barrier to investment. The minimum initial investment starts at just RM100 (may depend on your provider), which is an easy way to diversify your money through unit trust funds.
- Tax relief. You can claim tax relief of up to RM3,000 when you invest in PRS until 2025. Depending on your tax bracket, this could mean tax savings of up to RM900.
- You could lose money. Your returns on investment are not guaranteed. You could even lose money if your funds underperform.
- There are fees. You may have to pay a sales charge of up to 3% and an annual management fee of up to 5%. These fees can seriously eat away at your returns over many years.
What funds can you invest in?
Currently, there are 58 unit trust funds approved by the PRS with eight different PRS providers. You can find a full list of funds, their performance and fees here.
When investing with each provider, you can choose to invest in the default core funds depending on your age:
|Core funds||Age||The description|
|Growth funds||Under 45||● Focuses on portfolio growth
● High risk
● Up to 70% invested in equities
|Moderate fund||45-54 years||● Focuses on growing the portfolio while seeking consistent income
● Moderate risk
● Up to 60% invested in equities
|Conservative fund||55 and over||● Focuses on income generation and portfolio preparation for retirement
● Minimum risk
● Up to 20% invested in equities
When investing in these core funds, you can also opt for the Auto Glide Path, which automatically shifts your funds from a riskier asset allocation to a more conservative allocation as you approach retirement.
If you prefer to choose your own funds, you can invest in any of the non-core funds, but the risk and return profiles of these funds may not match your age range.
Here’s how PRS funds performed
Here’s a look at how the PRS funds have performed over the past five years (May 1, 2016 to April 30, 2021).
- Eight out of 58 funds have no performance history during this period.
- Twenty-two funds have annualized returns greater than 6%.
- Three funds have negative annualized returns between -0.99% and -5.67%.
- Non-core funds performed the best with average annualized returns of 8.24%, followed by Core Growth (7.93%), Core Moderate (6.3%) and Core Conservative (4.07%).
- Here are the top performing funds, based on annualized returns:
|Principal PRS Plus Asia Pac Ex Jpn Eq A||Non-Core||14.66%|
|Principal Islamic PRS Plus Asia Pac Ex Jpn Eq A||Non-fundamental Sharia||13.86%|
|Public Mutual PRS Islamic Strategic Equity||Non-fundamental Sharia||12.53%|
|AmPRS – Islamic Equity D||Non-fundamental Sharia||11.69%|
|Islamic growth of public mutual PRS||Basic growth sharia||11.46%|
Source: PPA. Note: Past performance is no guarantee of future performance.
In short, investing in PRS could help you grow your savings at a rate comparable to or higher than EPF, which has produced dividends of 5% to 6.9% per year for the past five years. Most of the PRS funds posted positive returns during this period. But if you choose the wrong funds, you risk losing your money or growing it at ridiculous rates.
How to contribute to PRS
There are three ways to start contributing to PRS:
The initial contribution starts at RM100 only, but this may depend on your provider.
Like regular mutual funds, these fees will apply:
- Subscription fees: 0% to 3%. This is the upfront charge you will pay when you invest. For example, if you invest RM 1,000, a subscription charge of 3% means that you will actually invest RM 970, while RM 30 is allocated for fees.
- Annual management fees: 1% to 5%. This is the annual fee that you will have to pay to the professional fund manager. It is subtracted from the value of your fund.
- Switching costs: You have to pay a conversion fee if you want to transfer your money from one fund to another.
How to withdraw your PRS money
To withdraw your money, simply contact your PRS provider or visit your provider’s online portal. But the process can be tricky depending on your age:
a) Withdrawal at age 55 or over
You can make full or partial withdrawals without any penalty.
b) Withdrawal before age 55
Your PRS savings are divided into two sub-accounts. When you contribute to an SRP, 70% goes to subaccount A, while 30% goes to subaccount B.
You can only withdraw your money from sub-account A if you intend to leave Malaysia for good. Otherwise, you can only withdraw from sub-account B. If your withdrawal is not related to leaving the country or covering housing and health care costs, you will have to pay an 8% tax penalty on the amount withdrawn.
You can only withdraw once per calendar year.
How much can you save with PRS tax break?
The potential tax savings are a huge draw in contributing to the PRS. You can claim tax relief of up to RM3,000 when you invest in PRS until 2025. Depending on your tax bracket, this could save you up to RM 900.
To calculate your tax savings, simply take your taxable income (also known as taxable) and enter it into the calculator below. Your taxable income refers to your total annual income less any tax exemptions and tax breaks to which you are entitled.
For example, if your total annual income is RM 60,000, your taxable income would be RM 47,000 after individual tax relief of RM 9,000 and EPF tax relief of RM 4000. If you contribute RM3000 to PRS, you will pay RM240 less tax.
Your tax savings after contributing RM3,000 to PRS:
Data: PPA; Tax rate for tax year 2021
So… should you invest in PRS?
Most Malaysians are not saving enough for retirement. If you already have an emergency fund and have already paid off your high interest debt, putting money aside in the SRP can help improve your chances of a comfortable retirement. Plus, paying less taxes while increasing your savings doesn’t hurt either.
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