Should You Reduce Your EPF Contribution?

UPDATE

As of January 2021, the new statutory contribution rate for employees under the age of 60 will now be 9%.

This contribution rate will apply to salaries earned between January 2021 (February 2021 contribution) and December 2021 (January 2022 contribution).

Members who wish to maintain their contribution rate at 11% will need to request opt-out by completing the Borang KWSP 17A (Khas 2021) form, available on the EPF website (www.kwsp.gov.my) from of December 1, 2020.

The completed form should be submitted to the member’s employer for online registration from December 14th.

The 2020 economic recovery plan was announced despite the political unrest currently afflicting our country. This alone is a massive achievement given the fact that Parliament is currently suspended.

Part of the package plans to reduce employee contributions to the Employee Provident Fund (EPF) to 7% for the duration of April to December 2020. The intention here is to give Malaysians more disposable income, which in turn will stimulate the economy and cushion the impact of a global economic downturn.

While I can see how this might improve matters, I continue to opt out of the reduction – and will keep my EPF contributions at 11%.

Why?

I like having money, especially when my bank balance seems bigger. Let’s take an example of an ordinary Malaysian house earning the median income (according to the Statistics Department) and how the change in FPE contribution would affect them.

SalaryRM5,228
Normal EPF contribution (11%)RM575.08
EPF special contribution (7%)RM365.96
DifferenceRM209.12

As you can see, a median salary of RM5,228 would translate into an additional RM 209 per month to spend money under the new scheme. Depending on who you ask, this could be a lot of financial leeway or next to nothing at all.

Now, the reduction is supposed to last from April to December 2020. This equates to nine months of “additional” spending. Let’s do the math:

RM209.12 x 9 months = RM1.882.08

It is not an insignificant amount. In fact, it might even help pay for Hari Raya Aidilfitri’s celebrations taking place in May – which would be greatly appreciated by just about anyone.

But here’s what you need to remember: it’s always MY money, just like it’s always your money. I don’t earn more than before.

Long term impact

But what happens if you leave this amount in your EPF account? What would it do for your pension fund? The table below examines the impact of this amount on a 30-year-old employee who intends to retire at 65.

AmountRM1882.08
Time35 years
Average annual EPF dividend6%
TotalRM14,465.83

If the EPF dividend stays at an average of 6% each year, your small investment should have increased by more than 750% when you retire. This is not a small number, especially when many Malaysians are unsure whether they can afford to retire.

It would be 14,466 RM missing from my pension fund if I decide to take the contribution reduction.

It is not the first time…

We have already seen this reduction in contributions to the EPF. It was introduced in 2016, when the rate was lowered to 8% until January 2018, after operating for 22 months.

I chose to keep my contribution at 11% at the time; and most of you too. A survey of iMoney readers showed that 84% of you chose to keep the premium rate higher. The then second finance minister, Datuk Johari Abdul Ghani, even noted that only half of all Malaysians chose to contribute less.

While the intention of the measure was to stimulate economic growth, the EPF noted in the same year that 9 out of 10 Malaysians had no savings. It was not about savings in EPF – although it was included. It was about savings in general.

Civil duty to spend?

The 2016 Malaysian Household Income Census showed that there are 6.9 million households in Malaysia. If each of them took the reduction in FPE contribution, there would be an additional RM 1.4 billion in circulation in the national economy every month.

Ideally, this would stop the bear market; and perhaps even neutralize the damaging effects of the COVID-19 virus on the economy.

However, that doesn’t mean you shouldn’t make your own decision. Some of you might appreciate having a little extra cash to get you through the next holiday season. It’s perfectly okay to think about going through the present when things are tense.

All I’m saying is that you should carefully consider the implications of changing the contribution before making a decision.

PS You are probably already familiar with all of this information if you are one of our regular readers, but why not share it with your other friends who may not be so financially savvy.

Read more about EPF related articles here.

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Jothi Venkat

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