What is PRS
A private Retirement Scheme (PRS) is a voluntary long-term savings and investment scheme designed to help individuals accumulate savings for retirement. PRS offers a structured way for Malaysians to save for their retirement years beyond the mandatory contributions to the Employees Provident Fund (EPF). These schemes are managed by private sector fund managers licensed by the Securities Commission (SC) Malaysia.
👀 Takeaway 1: PRS is fully licensed and regulated.
Who manages PRS
Private Pension Administrator Malaysia (PPA) is the central administrator for PRS. It is a body approved by the Securities Commission to protect PRS members' interests. The PPA was established on 18 July 2012. You can always check the list of approved providers on the SC website here.
You can also check if your consultant is registered to sell PRS products through the tool provided by the Federation of Investment Managers Malaysia (FIMM) which is available here.
🤔Tip: A registered consultant will never shy away from providing you with their details if you say that you would like to check their credentials with FIMM. So, if they become iffy about it then you ought to be suspicious.
🎤 Takeaway 2: You have a recourse for complaints.
What are its benefits?
- Tax Benefits: Contributions to PRS are eligible for tax relief, encouraging individuals to save more for retirement while enjoying potential tax savings.
- Flexibility: PRS offers a variety of funds catering to different risk profiles and investment objectives, allowing investors to choose schemes that align with their preferences.
- Professional Management: PRS funds are managed by experienced fund managers, providing investors with professional expertise in managing their investments.
- Long-Term Savings: PRS encourages long-term savings habits, helping individuals build a significant nest egg for retirement.
- Portability: PRS accounts are portable, allowing individuals to switch between PRS providers or funds within the same provider without losing tax benefits.
What are the considerations?
- Risk Assessment: Investors should assess their risk tolerance and choose PRS funds that match their comfort level with market volatility.
- Fees and Charges: Consider the fees associated with PRS, including management fees and sales charges, as they can impact the overall returns on your investment.
- Performance Track Record: Research the historical performance of PRS funds and the reputation of the fund managers to make informed investment decisions.
- Regular Review: Periodically review your PRS investments to ensure they continue to align with your financial goals and risk tolerance.
- Diversification: Diversify your PRS investments across different funds to spread the risk and enhance the potential for returns.
📑 Takeaway 3: Like all investment products, there are benefits and there is also a list of things you ought to consider properly.
How does the tax relief work?
A lot of people consider PRS because of the potential for tax savings. It is not the only reason to consider PRS (I'll get into this more below), nevertheless the industry has been focusing on this hook hence it is now the feature that is sold the most.
The table below provides an illustration of the tax savings amount you could enjoy from your annual RM3,000 PRS contribution. For example, if your tax bracket is 11%, your RM3,000 PRS contribution will give you tax savings of RM330.
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| What is the potential tax savings from PRS? Source: PPA website |
🤔Tip: You have to make your contribution before 2023 ends to enjoy the tax relief for your 2023 assessment (which you will file in 2024). So, as it stands, you can make use of this relief for 3 more years (2023, 2024, 2025). To be safe you should make your contribution by the 15th of December 2023 for the 2023 assessment.
💸 Takeaway 4: If you do need the tax relief, PRS provides you with this additional benefit while investing your money - i.e. you reduce how much you spend on tax on one hand, and potentially grow your money on the other hand.
What else should I know?
It is helpful to think of PRS as sort of a voluntary EPF. The reason for this comparison is that, like the EPF, your investments are split into two accounts. EPF calls it Account 1 and Account 2, whereas PRS refers to them as Sub-Account A and Sub-Account B. Also, like the EPF, you can only withdraw the full amount once you reach age 55, but there are some exceptions.
The table below provides the scenario for withdrawals pre-retirement.
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| Pre-retirement withdrawals. Source: PPA website |
As you can see, it somewhat mirrors the pre-retirement withdrawals allowed under EPF i.e. some flexibility to withdraw from your second account (Sub-Account B) under specific conditions. Pre-retirement withdrawals from Sub-Account B may only be made from a PRS fund one year after the date of enrolment, except when it is due to permanent departure.
PPA has a detailed FAQ here.
Should I consider PRS?
***Everything that follows from here is my personal opinion***
*** I am a registered consultant with Principal Asset Management, which is a PRS provider ***
Here are my reasons why you ought to give PRS serious consideration.
- You are forced to save for your retirement. A lot of the chatter around PRS tends to compare it to investing in equities on your own, and therefore, questioning the need to sign up for PRS and paying the associated fees. Here's the simple thing that many of these 'financial gurus' overlook: the only way to secure your retirement is to have some sort of forced investments which you cannot easily touch before you retire. Everything else that you invest in can be easily liquidated. You should not mix investing for retirement with investing for paying towards a house/car/holiday/wedding/sabbatical etc.
- If you already have EPF, PRS (provided you choose the right funds) will give you greater diversification for your retirement portfolio. 61.4% of EPFs total assets are invested domestically. Using PRS as an option to expand your geographical exposure is worth considering. In fact this is a common mistake I see a lot of people make - they are over exposed in Malaysia, which is absolutely redundant since EPF already does that job for you.
- Let's address the fees issue. Firstly, people pay a fee for poor investment decisions all the time without even knowing it. I have seen portfolios where the i-invest portion from their EPF is invested in fixed income instruments. They take pride in doing it themselves and hence incur zero fees, but fail to consider that putting it in the wrong portfolio costs them easily 2-3% penalty compared to what they would have made if they just kept it in their EPF account. I have also seen people put their hard earned cash into equities through investment apps with low fees, but choose the wrong risk profile and make one huge lump sum investment just as the market turns against them. The hidden fee one pays for that is extremely high. A good consultant is worth at least 3% when you consider that making a mistake can easily cost you 20-30% of your value. This is classic penny-wise pound-foolish.
- While it exists, you might as well make use of the tax relief if you are able to benefit from it. I purposely left this last as I believe that there are more compelling reasons to consider PRS as mentioned above.
Conclusion
If you have some money left over at the end of every month, you ought to consider making monthly contributions to PRS. The real work is in choosing which fund to invest in. You can either spend the time required to research all the funds, or work with a (good) consultant who is worth his/her commission.
The real value is in how much your 55-year old self will thank you.
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