Should EPF Allow Other Types Of Withdrawals?

We all know that the money in our Employee Provident Fund (EPF) account is to be used for our retirement, but what if we need it now?

This year has been extremely difficult for Malaysians who have lost their jobs due to the pandemic. According to the Social Security Organization (Socso), 90,000 workers have applied for unemployment benefits from the organization so far this year. In total, more than 700,000 people remain unemployed this year.

For those who have no income or are unable to find sufficient income now, it is even difficult to think about the next month, let alone retirement years later.

This year alone, the government announced additional withdrawals from i-Lestari and i-Sinar so that members have access to their EPF savings in the event of job loss or reduced income. The employee’s FPE contribution rate has also been reduced from 11% to 7% from April to December of this year and from 9% from January to December next year.

While necessary, these pandemic initiatives could have a long-term impact on your retirement savings.

If you had the opportunity to tell EPF what to do with your savings, what would you like EPF to change?

Just take three minutes to tell EPF in this survey. Click here.

What happens if you use your retirement savings early?

Given the job losses and widespread pay cuts this year, it’s no surprise that many people are tempted to use up their retirement savings. When your house is at risk of being auctioned off or your car is repossessed right now, it doesn’t help if you can’t use your retirement savings until 20 years later.

However, you need to decide whether the benefit of using your retirement savings outweighs the cost of losing potential dividends that you could earn if you don’t withdraw it.

EPF members who withdraw their savings may lose the benefits of the mix of returns they might have achieved over a number of years.

So how much are you going to lose?

For example, starting December 21, qualifying EPF members can withdraw between RM 10,000 and RM 60,000 through the i-Sinar program.

If you keep your RM 60,000 in retirement savings instead of withdrawing it to spend, this is what you’ll get after five years based on just 4% interest earned per year.

YearValue of retirement savingsInterest earnedEnd of year value
160,000 RMRM 2,400.00RM62,400.00
2RM62,400.00RM 2,496.00RM64,896.00
3RM64,896.00RM 2,595.8467,491.84 RM
467,491.84 RMRM 2,699.67RM70,191.51
5RM70,191.51RM2,807.66RM 72,999.17

Compound calculator:

If you add up the total compound interest earned in five years, you’ll have an additional RM12,999.17!

On the other hand, if you take out your retirement savings and use it to reduce an outstanding loan where the compound interest you owe is higher than what you would earn if you kept the money in your EPF savings, it would make sense for you to do so.

But don’t forget to repay what you have withdrawn from your EPF savings yourself in the years to come, because you will still need this money when you retire.

What you need to know before withdrawing your savings

In addition to i-Lestari and i-Sinar, EPF currently allows withdrawals based on these categories:

Source: EPF 2020 public consultation survey

Most of the authorized non-retirement withdrawals come from Account 2, while the money from Account 1 is really meant to be used only when you reach retirement age with only death, total disability, or permanent departure. country as the only exceptions.

The money in your retirement savings should be used to help you spend your entire retirement. So, what would justify withdrawing it before you retire?

There are times when withdrawing money from your pension fund can prevent financial disaster, such as losing your home, losing your insurance coverage, or building up high interest debt.

Before tapping into your retirement funds, ask yourself the following questions:

  • Can you take out a short-term loan at a lower interest rate than your EPF dividends?
  • Can you convert part of your equity or assets to cash?
  • If you are a homeowner, have you considered refinancing?
  • Have you used all the financial aid provided by the government like Penjana and Kita Prihatin?

Using your retirement savings should only be the last resort when you run out of options.

What does EPF do with your money?

The EPF 1991 law specifies that it provides for a “savings scheme for the retirement of employees and the management of savings for retirement purposes. The money you store in EPF is therefore used for retirement planning. This is different from financial planning.

When you are still young and working hard to earn more money, you can focus more on financial planning to grow your wealth through investments while saving money for various short and long goals. However, you also plan for retirement when you put a portion of your monthly income into EPF.

Planning for retirement is more than saving money. You need to make sure that the money you set aside for retirement can help pay for your living expenses once you stop earning income. It means understanding how that money and all the other assets you own can still create monthly income for you when you stop working.

When you retire, it’s your money that has to keep working. This is what the EPF does with your contributions. There are investment services, advisory services and member savings management services for tax relief, death and disability, and bankruptcy protection.

Source: EPF 2020 public consultation survey

If EPF has done a good job increasing your savings, is the scheme ready for the changes we are seeing in the employment landscape?

According to the Department of Statistics (DOSM), more than a quarter of the Malaysian workforce is now self-employed, and the odd-job economy is growing faster than that of the conventional workforce.

Can the existing EPF scheme still help the Malaysian workforce of the future to increase their retirement savings?

For example, to help you meet your savings and retirement goals, should there be a maximum limit for voluntary membership contributions given the changing nature of jobs today?

What about imposing a different dividend structure on the retirement portion of your savings (account 1) compared to the more flexible terms of account 2. In addition to the services listed above, should EPF be involved in managing other services to help you grow your investments?

It’s time to let the EPF know what has been done well and what changes you want to see.

Our sincere thanks to
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Jothi Venkat

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