EPF Account 3: Avoid impulsive withdrawals, financial planning crucial – experts

Although the new account, officially called ‘Akaun Fleksibel’, is intended to help members set up an emergency fund for their future, the risks far outweigh the benefits, especially if they are allowed to withdraw their savings at any time, depending on their needs, experts warned. .

Senior Fellow and Director of the Institute of Islamic Understanding Malaysia (IKIM), Dr Muhammad Hisyam Mohamad, said that instead of resorting to impulsive withdrawals, contributors should use the account as a contingency through self-discipline and responsible financial planning .

He said while EPF has given its members the flexibility to withdraw their money from Account 3 at any time from May 11, the final step was not the original purpose of the retirement savings fund.

According to him, EPF is generally a savings account for retirement and members were previously allowed to withdraw their savings from account 2 for specific purposes such as education, healthcare or housing.

“This time, Account 3 has been created to meet the basic needs of the contributors and those facing emergencies. This initiative would in a way help community members who have been hit hard by the rising cost of living and are still saddled with low wages or salaries.

“What is worrying, however, is that withdrawals are being made for non-urgent matters such as buying gadgets, furnishing the house, buying car accessories or to keep up with fashion trends. Furthermore, purchases can be made easily through the ‘buy now’ system. ‘pay later’ platform, he recently told Bernama.

SAVINGS FOR AN AGING NATION

The agency introduced three new accounts, namely ‘Akaun Persaraan’ (formerly known as Account 1), which serves as a depository for savings aimed at retirement; ‘Akaun Sejahtera’, previously known as Account 2, is designed to meet different lifecycle needs and the latest Account 3 or ‘Akaun Fleksibel’, which was introduced on April 25 to provide flexibility for short-term financial needs.

Photo from https://www.kwsp.gov.my/

Effective May 11, 2024, new contributions will be based on percentage: Akaun Persaraan (75 percent), Akaun Sejahtera (15 percent) and Akaun Fleksibel (10 percent) compared to before, i.e. Akaun 1 (70 percent). ) and account 2 (30 percent).

After the restructuring, the balance on Account 1 and Account 2 will remain at Akaun Persaraan and Akaun Sejahtera respectively, while Akaun Fleksibel will start with a zero balance. The dividends remain the same for all three accounts.

Muhammad Hisyam further said that the move to implement Account 3 would go a long way in addressing large-scale withdrawals witnessed during the COVID-19 pandemic.

“But from other aspects, the introduction of Account 3 means that 10 percent of the contributors’ savings, which previously had to be kept in the EPF for retirement or housing, education or healthcare purposes, can be easily withdrawn by the members at any time included.

“In other words, if a member regularly withdraws money from Account 3, 10 percent of his or her retirement savings will be depleted before retirement.

“Although the total is only 10 percent, contributors should not lose sight of the implications as Malaysia will experience an aging population by 2030, with the percentage of people aged 60 and above reaching 15.3 percent of the total population. At the same time, the cost of living will also increase.

On the issue of insufficient funds for their retirement, he said that during the COVID-19 pandemic, many hard-hit contributors were struggling to make ends meet. Hence, the government has decided to allow contributors to make four types of withdrawals from their EPF savings, involving i-Lestari. , i-Sinar, i-Citra and special recording.

Senior Fellow and Director of the Institute of Islamic Understanding Malaysia (IKIM), Dr Muhammad Hisyam Mohamad.

According to him, as a result of the series of withdrawals, the number of active formal members who met the minimum savings benchmark of RM240,000 at the minimum age of RM240,000 has also been reduced.

For the record, the Ministry of Finance was also quoted in a written response via Parliament’s website on Nov 20, 2023: A total of 6.3 million members or 48 percent members under the age of 55 have savings of less than RM10. 000 in their accounts as of September 30, 2023.

“This indirectly indicates that if the issue is not addressed, most contributors would be in dire financial straits during their retirement. Due to the continued increase in average life expectancy, premium payers’ savings will not be sufficient to meet their needs ten to twenty years after retirement.

“As such, the government must step up efforts to promote financial literacy among the people so that they can manage their finances or income in a more effective manner,” he added.

REQUIREMENTS FOR INDIVIDUALS TO MANAGE FINANCES

To a question on the practical feasibility of this initiative in addressing the issue of cost of living among the people, Muhammad Hisyam said: This would depend on the monthly contribution of the members.

He said members with a larger contribution to Account 3 would be able to meet the cost of living given the higher disposable income for expenses.

“In Malaysia, employees contribute up to 11 percent of their salaries to the EPF every month, while employers have to contribute up to 13 percent of their employees’ salaries.

“However, for a low-paid worker who receives a minimum salary of RM1,500, for example, the contribution from employee and employer may amount to approximately RM345 per month and here the total savings deposited into account 3 will be RM34. Only 50.

“Actually, this issue is related to the low wages received by Malaysian workers. For example, the minimum wage of RM1,500 is actually much less than the living wage for an individual of RM2,700 as proposed by Bank Negara in 2017. If the salaries and wages received by workers remain low and do not rise along with the cost of life will put the burden on affected individuals who will not be able to improve their quality of life,” he said.

He also said that contributors will have a surplus of cash in hand through Account 3, but their pension funds could be reduced by 10 percent in the long term if they continue to withdraw regularly and miss the opportunity to generate income through monthly declared dividends. by EPF, which are considered competitive in the market.

“EPF has predicted that to some RM25 bmillion would be drawn in the initial three-month offering period, while monthly withdrawals after the front-loading phase would be approximately RM4 billion to RM5 billion.

“This will create a flow of funds into the market that will help businesses and entrepreneurs through contributors’ spending. However, it could also give rise to price increases if the government does not exercise proper control, and worse, the salary increase for civil servants at a rate of over 13 percent from the end of this year will not bode well.” he said.

BOOST THE SOCIAL SECURITY SYSTEM

Meanwhile, Muhammad Ridhuan Bos Abdullah, senior lecturer from the School of Economics, Finance and Banking, Universiti Utara Malaysia (UUM), said consumers’ saving and spending patterns are largely influenced by the economic cycle.

He cited the years 2021 and 2022 as examples where EPF withdrawal trends were high due to sluggish economic growth due to the pandemic.

Senior lecturer at the School of Economics, Finance and Banking, Universiti Utara Malaysia (UUM), Muhammad Ridhuan Bos Abdullah.

Describing Bill 3 as more flexible in encouraging self-employed groups to save, he said the current trend shows that most of the younger generation is focused on self-employment or working as informal workers.

“If more people choose to work on a voluntary basis (informal workers), this will indirectly strengthen the social security or protection system of workers.

“Account 3 can help contributors during an economic cycle (economic downturn) or in dealing with economic vulnerability such as loss of income, etc. Account 2 still provides facilities for contributors to purchase a home and for their educational needs.

“After May 11, the total savings in Account 1 will be increased to 75 percent, compared to 70 percent previously. As such, the goal of saving for old age remains, and even better, with the value expected to boost participants’ savings in retirement,” he said.

Muhammad Ridhuan said stable and sustainable economic growth will be the deciding factors for employers to pay contributors’ salaries for the T20, M40 or B40 groups.

He said that given the favorable short-term economic conditions, contributors’ contributions will stabilize provided no withdrawals from Account 3 are observed.

However, in the long run, contributors’ needs will change depending on the economic cycle, and contributors’ spending behavior will also change due to larger family size, increased asset ownership and educational needs of family members, etc.

“The government’s stabilization policy is crucial for maintaining a stable economic environment. This approach will help mitigate the impact of economic cycles, as evidenced by the volatility of gross domestic product (GDP) growth and the labor market in 1997/1998, 2008/2009 and 2020/2021, which led to large-scale layoffs .

“The economic cycles are above expectations. For example, saving money through financial institutions and EPF is crucial as it helps contributors mitigate the impact of adverse economic conditions, especially after retirement.

“Asian countries such as Japan, South Korea and Singapore have high savings rates, their GDP and per capita income are also high. However, it is best that we use our own model based on our per capita income and GDP performance,” he said.

Translated by Salbiah Said