Employees’ Provident Fund (EPF) – 3 Important Things You Should Know

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On 17 February 2019, the Employees’ Provident Fund (EPF) announced a 6.15% dividend for conventional savings. Undoubtedly it has raised eyebrows as most experts surmised that the dividends for 2018 were unlikely to reach 6%.

Though the dividend rate is lower than last year, its performance has still exceeded expectations from all quarters. 

For those who have been dabbling in the stock market, most likely they would have experienced the financial tailspin in 2018 due to the turbulent global economy exacerbated by the US-China trade war.

KLCI historical chart 2018
KLCI historical chart 2018 (Source: Yahoo Finance)

What is EPF?

KWSP logo

Many have limited understanding about EPF despite it plays a vital role in every Malaysian’s retirement planning. It may even possibly make a life-or-death difference in their golden years.

EPF is also known as Kumpulan Wang Simpanan Pekerja or KWSP in Malaysia. The fund was set up under the statutory law primarily to manage the private sector employees’ retirement savings. The EPF Act 1991 requires both the employees and their employers to make mandatory contributions to the fund.

The contributions are allocated 70:30 into two separate accounts respectively – Account 1 and Account 2.

It allows its members to withdraw their savings at retirement age or under specific circumstances in accordance with the framework. 

3 Important Things that You Should Know About EPF

As of 31 March 2018, EPF’s assets under management amounted to more than RM800 billion, making it one of the largest pension funds in the world.

No big deal isn’t it? 

But here are the important things that you should really know about EPF.

1. EPF’s Historical Returns (And What’s the Significance)

The significance of EPF historical returns
Photo by Lorenzo Cafaro from Pexels

Over the last decade, it has generated an average return of 6.2% per annum. The returns are considerably decent as compared to the performance of most unit trust funds in the financial market.

EPF historical dividend rates 2009 - 2018
EPF historical dividend rates 2009 – 2018

So, what does that mean? 

Don’t ever touch your EPF account savings! Let time do its job and you’ll reap the benefits at the end of the day.

EPF’s member investment scheme allows you to transfer a portion of your savings to invest through the approved fund management institutions. These institutions are mainly asset management companies that offer all types of unit trust funds.

In my humble opinion, it’s certainly not a wise move to ever withdraw your EPF savings to invest in these unit trust funds. 

First off, you’ll benefit only if these funds are able to consistently generate above 6% return every year. Sadly, most have failed. More importantly, the exorbitant initial sales charge and annual management fee are good enough to eat up your investment. 

Ironically, the entry fee for unit trust funds in Malaysia is among the highest in the world.

Yet, many cynical unit trust consultants try to convince people to invest their EPF’s savings in unit trust funds. It’s already too late to throw a wobbly when they realise that they have been duped sooner or later.

2. You Can Self-Contribute to Your EPF Account

EPF self-contribution

Photo by rawpixel on Unsplash

With effective 1 July 2018, you can contribute any amount to your EPF account voluntarily. But the maximum amount is capped at RM60,000 per annum. 

The idea is that you can top-up your savings in addition to the mandatory contributions that you typically make through payroll deductions.

Though every individual may have different specific needs, there are a few obvious benefits of self-contributing to EPF account.

Firstly, it’s one of the better investment options in Malaysia given its consistent superior returns historically. The best part is that there’s always a 2.5% dividend return guaranteed by the Government.

Besides, EPF self-contribution is like forced savings. The brutal truth is that willpower is limited. Your EPF retirement savings will remain intact even though you might splurge on unnecessary things once in a while. That’s because it only allows you to withdraw the whole sum at retirement age or under limited circumstances.

3. You Can Withdraw Your EPF Savings Before Retirement

There’s always a misconception that EPF members can only withdraw their savings when they reach 55 years old.

EPF actually allows its members to withdraw their savings partially or in full for different purposes. You can make 17 types of withdrawal based on the current framework.

How does that help?

Let’s just forget about withdrawals due to incapacitation or death. You can actually maximise the benefit of the self-contribution option if you plan it right.

Education Withdrawal

EPF education withdrawal
Education is possibly the best investment you could ever make. (Photo by MD Duran on Unsplash)

EPF allows you to use your savings in Account 2 to fund either your children’s or your own higher-level education. Education is possibly the best investment you could make to get unlimited potential returns.

Of course, the savings in your EPF account is meant for retirement in the first place. But with the self-contribution option, you can make good use of its yearly high returns to save for education purposes.

Withdrawal to Purchase a House

EPF house withdrawal
Thinking about buying your first dream house? (Photo by Holger Link on Unsplash)

EPF also allows you to withdraw your savings from Account 2 to purchase a house. But if you can only afford to buy a house using your EPF savings, chances are your current financial situation doesn’t permit you to do so.

Again, I can’t stress it enough that your initial contributions to EPF account should be kept for retirement only. But if you plan to own a house in the future, EPF can help you expedite the process to achieve your financial goal.

Let’s say you want to buy a house worth RM300,000 in 5 years’ time with 90% bank loan. You need to save RM30,000 for the down-payment.

The first thought hitting your mind could be saving RM500 every month for the next 5 years. (RM500 * 12 months * 5 years) You might keep the amount in your savings account that earns you negligible interest.

But if you self-contribute RM500 every month to your EPF account, you will accumulate approximately RM27,000 by the end of year 4. The amount is calculated assuming an average dividend rate of 6% per year. With the compounding effect, you are likely to meet your financial goal in less than 4.5 years. 

Not only it ensures that you set aside enough money, it also saves you time to reach your financial goal as well.

Have doubts? Check out the EPF dividend calculation in this worksheet.

Final Thoughts

Simply put, my take is that always leave your mandatory contributions to EPF account untouched. EPF is no doubt a great investment vehicle for retirement planning.

If you have a specific financial goal like buying your first house, make good use of the EPF self-contribution option to take advantage of its high returns.

EPF can also serve as an emergency fund to pay your housing loan monthly installment when such need arises. It provides you a safety net when you go through rough patches in life. 

Though the Private Retirement Scheme (PRS) in Malaysia has gained traction over the years, EPF remains the core pillar to give you peace of mind in your golden years.

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