Private Retirement Scheme (PRS) Malaysia - Should You Invest?

Private Retirement Scheme (PRS) Malaysia – Should You Invest?

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Introduction to Private Retirement Scheme (PRS) in Malaysia

A few years back, my mom all of a sudden passed me a Private Retirement Scheme brochure. “Son, invest in PRS. You can get a RM3,000 tax incentive!” she said. That was the first time I’ve ever heard about PRS. PRS was first introduced in 2012. To date, many people are still unfamiliar with it though it has gained popularity over the past few years. What’s a Private Retirement Scheme, or PRS? How does PRS work in Malaysia?

Basically, it’s a long-term investment scheme with the aim to help you save enough for retirement. In contrast to Employees’ Provident Fund (EPF), contributing to PRS is voluntary. You decide how much and when to contribute. It also gives you the flexibility to choose which retirement fund that best suits your needs.

PRS complements the mandatory contributions made to EPF. It acts perfectly as an extra layer of safety net after your retirement.

The Mechanism of Private Retirement Scheme 

As the name implies, PRS is privately managed by asset management companies, also known as PRS providers. In 2011, Securities Commission Malaysia (SC) issued a regulatory framework to govern the industry. The framework sets out the roles and responsibilities of the key players within the industry to safeguard the interests of the contributors (you and me).

SC Regulatory Framework on PRS industry

The framework primarily governs 4 key parties in the PRS industry.

1. PRS Administrator

The Private Pension Administrator Malaysia (PPA) acts as a central administrator for PRS. Whoever contributes to a PRS has to register an account with PPA to become a member.

PPA is primarily responsible for record keeping, administration and customer service. It also provides lifetime account management and reporting to you as a PRS member. You can access your account information and top-up contributions anytime with just a click of a few buttons online.

Long story short, the whole purpose of PPA is to promote PRS investment to the public. And to make everything easy for you and me to invest in it.

2. PRS Providers

There are 8 PRS providers approved by SC as listed below:

1) Affin Hwang Asset Management Berhad

2) AIA Pension and Asset Management Sdn. Bhd.

3) AmFunds Management Berhad

4) CIMB-Principal Asset Management Berhad

5) Kenanga Investors Berhad

6) Manulife Asset Management Services Berhad

7) Public Mutual Berhad

8) RHB Asset Management Sdn. Bhd.

Each PRS provider offers a scheme to the public, in which comprises various retirement funds. Each retirement fund varies in terms of asset allocation and product mix.

You can choose any fund to invest according to your own risk preference and retirement goal. (Don’t worry, I’ll get into details shortly.) And of course, after comparing the historical performance of each retirement fund.

3. PRS Distributors

PRS distributors are entities that help PRS providers to market the scheme to individuals and employers. You can get advice and recommendations from PRS consultants appointed by the distributors or providers before investing in PRS. All PRS consultants have to register with the Federation of Investment Managers Malaysia (FiMM).

Before your head starts spinning, just imagine the distributors as agents and the consultants as salesmen. But the more professional ones.

You can refer here for more information on PRS distributors.

4. Scheme Trustees

Last but not least are the Scheme trustees. A Scheme trustee is like our guardian. It takes custody and control of the retirement funds’ assets and hold them in trust for us.

It also carries the responsibility of ensuring all accounts and records are complete and accurate. More importantly, it ascertains that the PRS Providers only act in our best interests.

How Does a Private Retirement Scheme (PRS) Work?

Each PRS provider offers a PRS scheme comprising multiple retirement funds. You can invest in more than one retirement fund under the same scheme. Or, invest in different retirement funds across different providers according to your own preference.

Private Retirement Scheme (PRS) Structure
Private Retirement Scheme (PRS) Structure

We have always been told that, “Don’t put all eggs in one basket.” Even an elementary school kid might be able to explain to you the concept very well. Obviously, it’s good to diversify your investment. But my advice is don’t overdo it.

“Many financial advisors recommend that you diversify for your own protection. What they fail to tell you is that it is also for their protection. Since most financial advisors cannot tell you exactly which stock or mutual fund is a great investment, they tell you to buy a bunch of them” – Robert Kiyosaki.

If you invest in too many funds, there’s a risk of over-diversification. It’s also known as DIWORSIFICATION! (P.S. I didn’t make up the word. Go check it out.)

Not only the benefits of diversification would be greatly reduced, it’s also difficult for you to monitor so many funds. Not to also mention the troublesome of transferring between the funds when you find out some are underperforming.

Retirement Funds Structure

There are two broad categories of retirement funds – Core Funds and Non-Core Funds.

Core Funds

Each provider must offer 3 core funds as a default option for PRS contributors. The core funds are allocated based on different age groupings as shown below.

Core Funds with different asset allocations and risk levels
Core Funds with different asset allocations and risk levels

“Hmm…I’m sure it’s not difficult to understand.” Your mother wit should be able to tell you the older you are, the less risky the fund. Let’s not get bogged down with the asset allocation. The default option is meant to make your life easier!

Non-Core Funds

But I’m not surprised that some sophisticated investors may prefer to choose their own funds to invest. Probably because of their own pride or they’re some investing aficionados. Sadly, I’m not…

Non-Core Funds comprise different asset allocations and risk levels other than those in Core Funds. Mainly to suit individuals with different needs and risk preference.

Who is eligible to invest in PRS?

Anyone who is at least 18 years old is eligible to participate in PRS including non-Malaysians. Seems like our caring government hasn’t forgotten about the foreigners’ contributions. Don’t be surprised. Even an undischarged bankrupt can still participate in PRS.

How to withdraw money from PRS?

There are two separate sub-accounts maintained under each retirement fund. Both sub-accounts have different criteria for withdrawal.

Sub-account A and sub-account B with different withdrawal criteria in each retirement fund
Sub-account A and sub-account B with different withdrawal criteria in each retirement fund

Your contributions to a retirement fund will be allocated 70:30 into sub-accounts A and B respectively. You can’t withdraw any money from sub-account A until you retire at the age of 55. (No change at the time of writing.)

It’s understandable that there may be times where you’d need money for emergency purposes. Don’t worry. You can still withdraw any amount out of the remaining 30% from sub-account B. Unfortunately, the withdrawal amount is subject to 8% tax penalty.

Special circumstances

There’re exceptional situations where you can withdraw your investment in full other than reaching your retirement age. Either you are permanently leaving the country, having severe disabilities or you’ve gone to glory. “Oops…Touch wood!”

Benefits of Investing in PRS

There’s no point for me to explain so much if PRS is not worth investing. Here are the 5 main benefits of investing in PRS that everyone should know.

1. RM3,000 Tax Relief

The most obvious reason to invest in PRS is because of the RM3,000 tax relief that you can enjoy in each year of assessment. Currently, the tax relief period is 10 years from 2012 to 2021.

PRS tax savings
Tax savings from RM3,000 tax incentive

Source: PPA website link.

Let’s say you earn a monthly salary of RM5,000 with a tax rate of 16%. You can save RM480 per year (RM3,000 * 16%). It’s a guaranteed return of 16% from investing in PRS!

The more you earn the higher savings you will get. I believe many people already knew about the tax savings from investing in PRS. But the benefit is somehow underrated. The tax savings can do wonders if you plan it right.

Imagine your RM5,000 monthly salary has been stagnant since 2012 until 2017. And you’ve been getting RM480 tax savings every year for 6 years in total assuming no change in tax rate.

If you had self-contributed to EPF every year with your tax savings, you would get a much higher return as calculated below. In hindsight, the average return from EPF is 6% p.a.

Calculation of return from re-investing tax savings earned from investing in PRS
Your return from tax savings could be much higher than you’ve thought!

In other words, you’ll get a total return of 20% (RM3,549/RM18,000) instead of 16% (RM2,880/RM18,000). This is just a conservative calculation. Because it’s assuming that your PRS provider hasn’t made a single cent since day 1.

Alternatively, you can consider investing in peer-to-peer lending that gives an average 10% return p.a. Refer  Peer-to-Peer Lending in Malaysia – Quick Guide for better understanding.

2. RM1,000 Youth Incentive

If you’re at least 20 years old and contribute RM1,000 to PRS during 2017 – 2018, you’ll get a one-off RM1,000 from our government. Provided that you’ve not reached 31 years old during the period.

The RM1,000 will be credited directly into your PRS account. You don’t have to apply for the incentive. The government will only release payments twice a year and PPA will notify you once the payment is made. The money is literally FREE! You can now re-calculate your own returns if you get both tax and youth incentives.

3. Flexibility and Ease of Investing in PRS

Since the scheme is voluntary, you can decide when and how much to contribute. The requirement for initial contribution is as low as RM100 only. You can plan how much to top-up subsequently after budgeting your monthly spending.

In January 2018, the Private Pension Administrator (PPA) introduced PRS online on its website. You can now sign-up with any of the PRS providers and top-up your contributions anytime, anywhere conveniently via PRS online.

It’s all at your fingertips!

4. Diversification

You can also see PRS as an alternative to diversify your investment portfolio. You might have invested in stocks, bonds, unit trusts, gold or what not. But you’ll never know how your portfolio will turn out in long term when you reach retirement.

Don’t rule out PRS as an option. It’s professionally managed by fund managers to help meet your retirement goal.

5. Save for retirement

According to EPF, 70% of members who withdraw their funds at age 55 used up their savings less than a decade after retiring. Clearly most Malaysians have not been saving enough for retirement.

If you understand the concept of compound interest, you’ll realize the importance of planning retirement early.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

One of the most effective ways of saving money is to pay yourself first before anything else. You can set a sum aside to contribute to PRS every month after getting your paycheck. What you don’t see, you won’t spend. (Read How to Save Money: 5 Great Tips for You to discover other effective ways of saving money in Malaysia.)

Differences between PRS and EPF

PRS works a lot like EPF with the same investment objective. Both are open for Malaysians and non-Malaysians as well. But there’re a few distinct differences between the two.

Contributing to PRS is voluntary in contrast to mandatory contributions made to EPF. You don’t have to choose any fund to invest in EPF as well. EPF has a legal obligation to maintain a minimum return of 2.5% every year. On the other hand, there’s no guaranteed return from PRS.

EPF also permits early withdrawal from Account 2 subject to certain criteria. Unlike PRS, pre-retirement withdrawal from EPF does not attract any tax penalty payment.

A Step-by-Step Guide to Invest in PRS

Investing in PRS is very simple and straightforward. Here’s the step-by-step guide to help you get started with investing in PRS.

Step 1: Choose a PRS Provider and a Fund

Firstly, you need to select a PRS Provider before choosing a fund to invest.

More often than not, some people may have a preference for one over another. Probably because of past good experiences or existing businesses.

If you’ve no specific preference like me, start off with comparing the historical returns of each available fund. Find the fund you are interested in before deciding on the PRS Provider. It’s called reverse engineering.

You can click on Morningstar Tools to find out all relevant information.

Here’s the sample. I selected Core Funds with moderate risk and historical performance by calendar year.

Morningstar: Core Funds historical returns with moderate risk from 2013 - 2017
Morningstar: Core Funds historical returns with moderate risk from 2013 – 2017

Of course, you can choose to compare all available funds. There are no hard and fast rules as long as you’re happy with your decision. Obviously, you won’t choose a fund which has been consistently making losses.

That’s the only key indicator for me to choose a PRS Provider and a fund to invest in. You can also get some advice from the PRS consultants before making a choice.

Here’s the summary of PRS and funds published on PPA website for your reference. It’s important to read and understand the fund’s product highlights sheet and disclosure document before making any contribution. The documents provide the key characteristics, product features, obligations and risk profiles of the funds.

Also, refer here for the fee comparison between the funds.

Frankly, it’s negligible for me since the fees are not too far off as each provider is competing for contributions. So long the fund that I’ve invested in is performing consistently, I’m okay.

Step 2: Sign Up via PRS Online  

Next, register an account via PRS Online. Fill in your details and verify your email.

PRS online enrolment

You will be directed to next page as follows.

PRS online enrolment form

Once done, you’ll need to upload your ID for verification.

PRS ID verification

Once verified, you can now select your PRS Provider and fund to invest in. The requirement for initial contribution will be auto-populated.

Choose PRS Providers and Fund view

Initial contribution amount

Lastly, you will be directed to the payment page.

PRS Online Payment page

Congratulations! You’ve made your first contribution to PRS!

But there ain’t no such thing as a free lunch. Since everything is made easy and convenient for you, it comes with a cost.

PPA’s Fees and Charges

There’s a one-off charge of RM10 for account registration. It’s currently waived if you sign up via PRS Online. But there’s an annual fee of RM8 per PRS provider and 0.04% admin fee p.a. Good news is there’s no charge on transfer or withdrawal until further notice. Refer here for more information.

Step 3: Top Up Contributions via PRS Online

You can now top-up your contributions anytime via this link.

Make your money works for you!

Alternatively, you can also invest in PRS via Fundsupermart. It’s popular among the millennials.

Wrapping-Up

If you’ve never planned for your retirement, it’s now time to get started with PRS. Looking at the tax and youth incentives (FREE MONEY) coupled with other benefits, I don’t see a reason why you’re not acting on it NOW! All the more reason if you’re self-employed…

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  1. Pingback: How to Save Money: 5 Great Tips for You | The World BizWeek

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