This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 8 - 14, 2016.
Those thinking of accepting the 3% reduction in their contribution to the Employees Provident Fund (EPF) should consider investing the extra cash in assets that could potentially provide higher returns rather than spending it.
Kevin K M Neoh (picture), who is a financial planner with VKA Wealth Planners Sdn Bhd, says the Private Retirement Scheme (PRS) is a platform one could consider.
“The most straightforward option would be to channel the additional cash to something that it is tax deductible like PRS. This way, the individual continues to save for his or her retirement with the same amount of money. When contributions are at 11%, any extra contribution does not qualify for tax relief. However, contributions towards PRS are entitled to a tax relief of up to RM3,000 a year. By employing this strategy, you may end up with additional income tax savings,” he says.
In the revisions to Budget 2016, employee contributions to the EPF were reduced by 3% to 8% from the current 11%. While it is an optional plan, the move is expected to pump some RM8 billion in consumer spending into the economy.
Between January and December 2015, conservative PRS funds had an average cumulative return of 3.23% while growth funds gave 8.54%.
Standard Financial Adviser Sdn Bhd director of advisory and practice management Gavin Teoh says another option is to channel the extra cash into unit trust funds with a focus on regional and global equity markets. “For those who are not interested in maintaining their contribution at 11%, this is something they can take advantage of.”
However, both Neoh and Teoh do not advise opting for the reduction.
“If you want to steal from your future self, then yes, you could opt to reduce your contribution,” says Neoh. “If your income per month is above RM6,250, it makes no difference if you continue with 11% or 8% contribution towards your EPF from March 2016 to December 2017. This is because at this salary, your contribution rate of 8% is equivalent to RM6,000 a year. Hence, you will still be maximising the tax relief for contribution made to the EPF.”
The budget revision was announced amid a continued plunge in global crude oil prices that has taken a toll on Malaysia’s revenue. The revised government budget now assumes an oil price of between US$30 and US$35 per barrel for the year. Crude oil price stood at US$29.88 a barrel on Feb 2.
When the original budget was tabled in October last year, it was based on an estimated US$48 per barrel.
To help ease the burden of the rising cost of living, it was also announced that a tax relief of RM2,000 will be granted to individual taxpayers earning monthly salaries of RM8,000 and below in 2015. The move is expected to benefit an estimated two million taxpayers, giving them an additional RM475 to spend.