Whilst the government have came up with several economic stimulus packages, one may also argue that it is insufficient especially for those struggling to meet ends' need. With that, EPF have been mostly been put on a spotlight recently on whether to allow members to dip into their retirement savings to meet ends need (today) vs. safeguarding their retirement future (tomorrow).

We have seen discussions all over the place - from high profile politician's comment, public's opinion, to the extend of EPF CEO's public comments with the Ministry of Finance, or even debates in parliament.

What does it really mean to all of us as individual contributors with all the withdrawal facilities (i-Sinar, i-Lestari) or investment facility (i-Invest) or reduced mandatory contribution rate from 11% to 9% throughout 2021? There has been many debates on these topic, even amongst the contributors. Some firmly believes in staying the course and swear NOT to touch EPF being their investment nest; whereas some will tap into any opportunity provided by EPF to withdraw their funds for specific purposes.

I have summarised some of my personal thoughts on these topics but before we get there, let's first establish some basic understanding on EPF!

Table of Contents

1. What’s EPF?
2. EPF Portfolio At A Glance
3. Investment Facility (i-Invest)
   • Background
   • Eligibility Criteria
   • Recommendations & Watch-out’s
4. Withdrawal Facilities (i-Sinar, i-Lestari)
5. Reduced Mandatory Contribution Rate
6. Wrap Up

What's EPF?

Also known as the Employees Provident Fund (EPF), which basically is a provident fund (a.k.a. retirement fund) established back in 1951 to help Malaysian workforce to save for their retirement in accordance to the Employees Provident Fund Act 1991.

Just like most of the provident/retirement fund in the world, it is a forced-savings approach with contributions from both Employees & Employers (or voluntary self-contribution for those whom run their own businesses) as an attempt to ensure that its citizen would have sizeable funds during their retirement years.

According to a recent study conducted by AKPK, majority of us Malaysians are not prepared financially for our retirement years and that's a bad sign for us. Many may not even be aware to the fact that they will need "larger amount" of retirement funds to sustain the "current lifestyle" they have during their retirement years, thanks to the inflation.

For example, if we're spending RM1000 a month today, we will need approximately RM1350 a month to afford the same lifestyle 30 years later, assuming 1% annual inflation rate. I myself, for one, will definitely not be able to survive and retire with just RM1000/month; let alone with the living expenses post-inflation.

EPF Portfolio At A Glance

Unfortunately, not much information is available on EPF's investment aside from the supposedly annually published reports. You can find KWSP Publications here for reports up to 2018, and somehow they "hid" the 2019 Annual Report here. Took me a while to realise that... I have been wondering what happened to the 2019's edition with 2020's already coming to an end while preparing for this article.

EPF's investment decision are mainly guided by their Strategic Asset Allocation (SAA) framework which focuses on optimising EPF’s long term investment return within the tolerable risk limits. The portfolio are primarily built up by fixed income instruments focusing on capital preservation and equities focusing on enhancing returns.

To put things into perspective, as of end 2018, EPF manages a total investment asset of RM833.76 billion (source: 2018 annual report) and the fund size have grown to RM924.75 billion by end of 2019 (source: 2019 annual report) after factoring in deposits and profits.

Based on 2019's data, they have invested RM360.44 billion into equities. By using the 69.7% domestic investments as a benchmark, we can safely assume that at least RM251.23 billion are invested into local equity market. This itself is is close to 15% of the entire Market Capitalisation in Malaysia, which was reported to be RM1,711.84 billion by end of 2019 (source: Securities Commission Malaysia). 

Despite that overseas investment only accounted for 30.3% of their investment assets, it have however contributed 41.0% of gross investment income. In terms of the Return on Investments (ROI) in 2019, foreign investment attributed to 7.78% while the domestic investment attributed to 4.90%.

 In a way, as the fish (EPF) is growing bigger and bigger as year passes by, the pond size (Malaysia Market) remains mostly stagnant. If we just take a look at the top 30 holdings by EPF today, you'll already see that EPF already owns significant portion for most (if not all) major local companies. 

Without the freedom being given to EPF to further diversify into international markets, they will be stuck with more than 70% invested locally which may potentially hamper their upsides for long-term growths.

Investment Facility (i-Invest)

Background

As part of EPF's initiative to empower the members to take charge of their own financial future, starting from their own unit trust investments. EPF have released i-Invest since August 2019 enabling eligible members to make informed decisions and manage their own unit trust investments.

With i-Invest, sales charge are capped between 0% to 0.5% which are way below the industry's average of 3% to 6% (or Fundsupermart Malaysia's 1% to 2%). In the past, if one were to diversify into Unit Trust Funds using their EPF Savings, they have to go through agents, fill up a tons of forms, and get charged with typical unit trust Sales Charge depending on platform. EPF's i-Invest eliminated most of these barriers by going digital and enforcing a cap to the maximum sales charge at only 0.5%. 

Since its' launch on August 2019, members have been tapping into the opportunity by managing their own unit trust portfolios offered by various Fund Management Institutions (FMIs). The total transaction value have grown close to 7 times as of April 2020, with total transacted value of RM219.3 million from the initial RM32 million on August 2019. 

Effective 1 May 2020, EPF have also waived all sales charge imposed by FMIs for investments transacted through i-Invest via EPF i-Akaun, for a period of 12 months ending 30 April 2021. This provides opportunity for members to diversify their EPF portfolio with zero upfront cost, though annual fund management fees will still apply.

Eligibility Criteria

As with before, there are certain eligibility to be met in order to diversify your investments into approved funds:

• You must be Malaysians or Permanent Residents (PR) or Non-Malaysians (registered as EPF Members before 1 August 1998)
• Below 55 years of age
• Have sufficient savings* with the EPF

You might be curious on the definition for "sufficient savings". Basically, EPF have defined an ideal minimum target savings based on members' current age, to ensure that they will have enough saved when they hit 55 years old. You can check out the "minimum basic savings" table in EPF's website here.

Based on the "minimum basic savings", 30% of the excessive amount in Account 1 can then be invested into your fund choices via i-Invest facility, with minimum starting from RM1,000.

Invest-able Amount = 30% * (Balance in Account 1 - Minimum Basic Savings) 

If you met the eligibility criteria and also have at least RM1,000 as investable sums, the next common question would be the following.

Should I Invest my EPF Savings into Unit Trust?

In the end it really depends on your personal circumstances, risk appetite, investment horizon, and pre-existing portfolio. I asked myself this question recently and debated whether if I should diversify my investments by leveraging the 0% sales charge provided by EPF i-Invest.

Ask these questions to yourself:

• What are your total portfolio asset/geographical allocation currently, after factoring both personal and EPF investments?
• What are your investment horizon till your retirement?
• What are your risk appetites?
• Are the significant risk exposure with no guarantees worth the potential upsides?
  • After all, only EPF guarantees a minimum downside of +2.5% with consistent track record of over 50 years
  • whereas all funds (except fixed deposit) will have unlimited (positive) upsides and also (negative) downside, with less proven track record
• Once decided, would you be able to stay the course, sleep soundly, and not meddle with your decision for years, unless things have changed fundamentally?
• How familiar are you with analysing financial products such as Unit Trust, such as fees, geographical/asset allocation, historical performance, strategy/objectives, ...

Some of the most common mistakes I have seen are those whom have been switching funds on a very high frequency - as if they are "trading" unit trusts as stocks. Investing should always be a long term game (>5 years) and one should avoid timing the market, but rather focuses on time in the market

Personally, after assessing my own situation, I have decided to further diversify my portfolio using the funds I have in EPF into several high-risk regional/global equity funds, as my current portfolio is overly exposed  (>55%) to Malaysia market (mostly thanks to the heavy domestic allocation by EPF). Additionally I also have a rather long investment horizon (at least 3 decades) for me to go through various cycles of market up and downs.

Withdrawal Facilities (i-Sinar, i-Lestari)

In a nutshell, i-Lestari and i-Sinar was developed as an initiative to provide relief to members whom were negatively affected financially due to COVID-19 and the economy. 

i-Lestari allows member to withdraw RM500 from their Account 2 on a monthly basis, effective 1 April 2020, providing up to 12 months withdrawal or end of validity period on March 2021, whichever is earlier. (source: i-Lestari FAQ)

i-Sinar allows member to withdraw an one-off advances between RM4000 - RM9000 or higher from their Account 1 (depending on your available balance). The advances must be replenished in which all future contributions will be allocated 100% to Account 1  until such time where the withdrawn advances are fully replenished. (source: i-Sinar Press Release)

As most Malaysians already do not have sufficient savings for their retirement, these should typically be rendered as the last-straw when no other better options are available. If withdrawals are made, the funds should only be used to meet ends' need and should never be spent for lifestyle purposes.

When dusts are settled, consider to build your stash of emergency funds to avoid the need to tap into retirement funds again should similar crisis occurs in the future.

Reduced Mandatory Contribution Rate

Similar with reduced mandatory contribution rate from 11% to 7% introduced in March 2020 as part of the economic stimulus package designed to encourage domestic consumption, the mandatory contribution rate remains reduced albeit at the rate of 9% throughout 2021.

Employees are given option to opt-out from the reduced rates, which I believe most (if not all) of us should stick with the old 11% rate as these are our forced-savings for our own good during retirement years.

Personally, I opted-out from the reduced rates during 2020 but will be doing something different in 2021 - by accepting the lower mandatory rate. I am only doing so as I am confident not to spend that extra 2% cashflow but instead, I will divert all of it into my international ETFs under my personally-managed portfolio.

Nevertheless, 2% may not mean much but it is just my little attempt to further diversify out from Malaysia by aggregating the sum into my existing monthly contributions to international ETFs.

Wrap Up

I hope that this article have provided you more insights on how you can look at EPF as part of your Core Portfolio which will play a crucial role in your retirement years. Their Strategic Asset Allocation (SAA) framework have primarily been designed to preserve members' capital while enhancing the value through consistent and sustainable growth. With this, I am relying heavily on EPF as the anchor of my overall investment portfolio and this have allowed me to pursue higher overall risks on my personal investments.

As much as possible, I strongly believe that one should avoid dipping into their EPF savings for expenditures, unless if there are really no other means to meet ends' need. Always remember that EPF will be your core retirement nests and plan carefully before deciding your next course of actions.

To better make an informed decision, always consider your current investment horizons, risk appetites and portfolio allocation. From there, you will have to assess what are the most suitable options which will work for you. Always do your own research, assessing your personal circumstances to come out with a personalised plan suitable for yourself.

In general, if you have no idea what you are doing, you probably should not even touch your EPF funds and let EPF manage it for you which they've consistently been doing a great job for the past 50 years. 

As always - thanks for reading and see you again in my next post! If you haven't already, be sure to follow me on my Instagram, Facebook and YouTube for latest updates!

Cheers,
Gracie

The post Malaysians, COVID-19 and their EPF savings appeared first on Ringgit Freedom.

While I did not sit around when the #Budget2021 was announced live over the evening yesterday, thanks to the power of social media and the beautiful summary done by KPMG Malaysia, I got up to speed rather quickly

I won't be discussing much on the macro-economics part of the #Budget2021, but instead I will be focusing more on the impact to our personal income tax, and zooming in some of those easy (and almost guaranteed) benefit for most of us with minimal criteria. But first we need to know what are the changes made to our personal income tax for year assessment (YA) 2021 onwards

What's changed in Tax Assessment Year 2021?

Generally I will be splitting them into two main categories, based on the policy's duration whether if a fixed period was specified ("Temporary") or if it an open ended ones ("Permanent"). Of course the government will have the right to amend or cease something the following Tax Assessment Year ("YA"). 

Permanent

• Reduction of 1% income tax rate for chargeable income bracket of RM50,001 - RM70,000 from 14% to 13% 
• Increased Tax Relief (+RM2,000) for Medical Expenses for Self, Spouse and Children capped at RM8,000
• Increased Tax Relief (+RM3,000) for Medical Treatment, Special Needs and Care Expenses for Parents capped at RM8,000
• Increased Tax Relief (+RM500) for Lifestyle Expenses capped at RM3,000 (p/s: existing category will now include electronic newspaper)
• Increased Tax Relief (+RM1,500) for Disabled Spouse capped at RM5,000

Temporary

• Income tax exemption (+RM10,000) for compensation of job loss capped at RM20,000 for YA 2020/2021
• Capped individual income tax rate at 15% for 5 consecutive Year Assessments, if the individual is an:
  • Non-Malaysian Citizens in Companies with Relocation Incentive, subject to approval and conditions.
  • Malaysian Citizens returning to Malaysia as part of Returning Expert Programme (REP), subject to approval and conditions.
• Income Tax Exemption for 50% of your investments made in Equity Crowdfunding, up to RM50,000 or 10% of aggregate income (whichever is lower) for investments between 1 Jan 2021 to 31 Dec 2023
• Expanded coverage for tax relief on expenses incurred for Study Fees for YA 2021/2022
• Extended Tax Relief (+4 years) for Private Retirement Scheme (PRS) contribution up to YA 2025, with existing tax relief cap at RM3,000.
• Extended Tax Relief (+2 years) for Skim Simpanan Pendidikan National (SSPN) savings up to YA 2022, with existing tax relief cap at RM8,000.

I know most items above are in super high-level - if you're keen to know more about the tax relief / changes in detail, check out summary done by KPMG Malaysia,

By now you may have already noticed - I highlighted some of the items in red above and you might have guessed it already - those are the ones I will be focusing on today!

What's so interesting about those changes?

As always, let's start with the easy one first:

Reduction of 1% income tax rate for chargeable income bracket of RM50,001 - RM70,000

As long as you are earning at least RM5,833.33 per month, it'd be a RM200 cash in the form of "tax reduction". Based on studies from Department of Statistics Malaysia (DOSM), 50% of the household (M2 and above) would hopefully enjoy this benefit (hence the "median" income)

Extended 4 years for Tax Relief on Private Retirement Scheme (PRS)

In short, 4 additional years for us to get tax relief based on contributions into your private retirement funds. One easy way to calculate? (I use it all the time to convince others to PUT MONEY IN PRS to save on taxes legally)

multiply RM3,000 with your highest tax bracket

• If you're currently taxed at 8% (chargeable income between RM35,001 - RM50,000), you will enjoy savings of RM240.
• If you're currently taxed at 13% (chargeable income between RM50,001 - RM70,000), you will enjoy savings of RM390.
• If you're currently taxed at 21% (chargeable income between RM70,001 - RM100,000), you will enjoy savings of RM630.
• If you're currently taxed at 24% (chargeable income between RM100,001 - RM150,000), you will enjoy savings of RM720.

See how the savings go up as your in tandem with your income bracket? Now think about what will happen when you reinvest and compound these savings until your retirement age.

Income Tax Exemption for 50% of your Investments made in Equity Crowdfunding

Now to me, this is really the interesting one. Or at least it intrigued my interest enough to start reading more about Equity Crowdfunding and to understand its concept - I have at least half a year to think and plan it, eh?

The concept is simple, up to 50% of your capital invested into Equity Crowdfunding will be exempted from tax, hence reducing your chargeable incomes, capped at RM50,000 or 10% your aggregate income (whichever is lower). However the upfront capital required would need to be significant enough to actually create an impact to the savings. 

Simulated Mr. Beans

Take an example Mr Beans being a T20 earner in Kuala Lumpur earning RM22,610 per month (source: DOSM), with take-home-pay of RM16,016.15.

Based on his aggregate income of RM271,320, he can potentially go for tax exemption up to RM27,132 which means that he'll need to invest at least RM54,264 into Equity Crowdfunding companies. 

Assuming he have an aggressive savings rate of 50%, he'd get approx. RM8,000 savings per month (rounded) which will net him with RM96,000 for investment purposes throughout the year.

To maximise the tax relief, he would invest RM54,264 out of RM96,000 from his savings; which also means that 56% of his investment will go into Equity Crowdfunding. Let's assume he went ahead with it - the upside that he will get immediately is a net tax savings of RM6,511.68, or approx ~12% ROI sponsored from the Government, assuming typical individual tax reliefs claimed.

This example is obviously biased - as we're talking about Mr Beans whom are part of the "top of the top" T20 group. While the realised benefit will still be in tandem with your corresponding tax bracket - it also begs the question: "with lesser pool of money available to invest, there must be many other alternatives out there where one can first capitalise?"

So what would I do?

For me at least, that's a huge risk that I personally would not pursue for a few reasons:

• Equity Crowdfunding, like any investment, comes with risk - except its risk are so much higher that I would keep it at most ~5% of my portfolio (or even lesser!)
• Liquidity. Unlike stock market where you can entry/exit easily, private equity isn't. 

Well at least one thing turned out well from this #Budget2021 announcement - I researched slightly into Equity Crowdfunding and decided that it's not for me yet at this stage. So we'll see next time.

This opinion piece went longer than I initially thought it would be, but I hope it was useful to you! Let me know in the comments below if there's anything else in particular that you'd like to know, and as always, see you in my next post!

If you haven't already, be sure to follow me on my Instagram, Facebook and YouTube for latest updates!

Cheers,
Gracie

The post My take on Malaysia's Budget 2021? appeared first on Ringgit Freedom.