A not-so-boring guide to your Private Retirement Scheme

How often do you think about life after work? 👵

If you’re like most people, not often. Retirement, grandkids, that vegetable garden you’ve been dreaming of starting… it’s all very far off. In our minds, retirement is always something ‘I’ll take care of later lah’.

This is absolutely normal. We’re always busy, how would we find time to start thinking about retirement?! But sadly, not planning ahead of retirement can be extremely costly. The Employees Provident Fund (EPF) say it themselves: Malaysians cannot afford to retire on their EPF savings alone. 🤯

In 2017, the EPF found that 64% of Malaysians aged 54 had less than RM50,000 in their EPF accounts. RM50,000 would last them for another 4.5 years only. That means many will have to go back to work, or start living frugally like students (which isn’t as fun at 60+).

But it’s not all bad news. The Private Retirement Scheme (PRS) was introduced in 2012 to encourage us to build our retirement income beyond just the EPF. The PRS is a great way to save money and get some tax breaks. 😏

So before you get into full panic retirement planning mode, let’s see what this PRS thing is really about.

What's a Private Retirement Scheme (PRS)?

Here’s what a PRS is in a few bullet points:

• A voluntary scheme for individuals above the age of 18

• A way to boost retirement savings, whether you’re a member of the EPF or not

• A personal tax relief of RM3,000 per year 💸

• A tool that allows you to withdraw your money at the retirement age of 55 years.

The PRS isn’t some random institution trying to do some good. It’s regulated by the Securities Commission Malaysia and safeguarded by the Scheme Trustees. It’s legit. 👍

Is PRS the same as EPF?

Not really.

First of all, the PRS is voluntary, whereas EPF is compulsory. Second of all, the PRS is privately run by financial companies without guaranteed returns. The EPF is government owned and guarantees a minimum return of 2.5% per year.

Employers can also contribute to your PRS, and receive tax exemptions for contributions for up to 19% of the employee’s base salary. So yes, the PRS is a great bonus, and it’s something employers use to attract employees. It’s a win-win situation.

Confused on how the PRS could benefit you? Don’t worry, we’ll be covering an example down below.👇

How much should I set aside?

This is entirely subjective and personal. It depends on how you answer “How comfortable do I want my retirement to be?”

Studies and reports recommend that you should live on at least 67% of your last drawn salary after you retire to maintain your standard of living.

How do you achieve this? Start setting aside 33% your salary every month now.

If you’re in the private sector, you’ll already be contributing 11% + 12% employer’s contribution to your EPF. This means that you would just need to save an additional 10% to reach that monthly 33%.

Source: PPA

How do I get started?

It's essentially free money because you won’t have to pay tax on the money you withdraw from your PRS after you reach the retirement age of 55. Woohoo!

Excited to get started? The first step to contributing to a PRS is picking the PRS provider you want to contribute to. You’re allowed to contribute to more than one (but overall the tax exemption is still RM3,000). Once you pick a PRS provider, you then need to choose to invest in one or more funds that you prefer the most.

Each provider will have different funds for people with different ages, risk appetites and allocation. Before picking a PRS provider, make sure to check the fees!

Feeling overwhelmed with all this money talk? No worries, our friend Robert is here to save the day. We’re going to follow the example of Robert, who’s decided he wants to start contributing to his PRS scheme. 💁‍♀️

Robert works in the private sector. He’s a consultant for a medium sized company in Penang. He contributes 11% of his salary to his EPF, and his employer contributes 12% on top of that.

Over the years, he’s accumulated RM40,000. He’s 36, and although isn’t thinking of retirement, he recently read a BigPay article that got him thinking about retirement pensions. That got him to take action (go Robert!). 🧔

He read that he should aim to contribute a total of 33% of his monthly income to his retirement. He decides he could do a bit more and contribute a total of 40% (he’s planning on retiring in a nice villa near the beach). As 23% is already covered by his EPF contributions, he just needs to save 17% more of his income to reach his goal of 40% total retirement contributions.

Robert is also working for a retirement friendly company. They offered to match his PRS contribution up to 5%. Woohoo! That means that Robert just needs to contribute an extra 12% to his PRS to hit his monthly goal.

He does a bit of research and shopping around, and chooses a PRS provider with the lowest fees (here’s a list of them). He understands that there’s no such thing as a risk-free investment. But he understands that the stock market can give him a good return (above inflation) over the course of 20 years. He decides to go with a Growth Fund (see above), with 70% in equities.

Once Robert reaches the retirement age of 55, he’ll be able to take the money out without having to pay any tax on it. And that’s when he’ll be able to enjoy his free money in his villa on the beach. 🏄‍♀️

Can you spot Robert?

How do you feel about your retirement? Do you already contribute to a PRS?

We hope that this article has encouraged you to think again of that dream vegetable garden or what you want to be doing in your 60s. Planning for your retirement doesn’t have to be complicated or time consuming. It really pays off in the end!

Make sure to read up as much as you can on the PRS before opening an account. 😉