Proper Re­tire­ment Plan­ning

Re­tire­ment… It is a word that most can­not as­so­ci­ate them­selves with. As we grow older, this is a con­cern that grows and be­comes more per­ti­nent. For mil­lions of Malaysians, the dream is to ac­cu­mu­late enough sav­ings in or­der to have the free­dom to en­joy a f

Insurance - - CONTENTS - by Dato’ Steve Ong Chief Ex­ec­u­tive Of­fi­cer Pri­vate Pen­sion Ad­min­is­tra­tor Malaysia

Ac­cord­ing to Dato’ Steve Ong, the word “re­tire­ment” is not well ac­cepted by peo­ple as many are con­cerned be­ing fi­nan­cially se­cure in their old age in the face of higher stan­dards of liv­ing and in­creas­ing med­i­cal costs. This ar­ti­cle ed­u­cates us about what is the Pri­vate Re­tire­ment Scheme (PRS) is all about, what one should ex­pect out of it and how one should ap­proach such schemes while plan­ning to­wards re­tire­ment.

How­ever, as peo­ple live longer, liv­ing costs in­crease and med­i­cal costs be­come more costly; more and more Malaysians are find­ing that the sav­ings ac­cu­mu­lated af­ter years of hard work are in­suf­fi­cient to see them through their re­tire­ment. Fi­nan­cial se­cu­rity has be­come a ma­jor con­cern for many, as they strive to at­tain a com­fort­able re­tire­ment tar­get to re­main fi­nan­cial in­de­pen­dent. In view of this sit­u­a­tion, as part of the gov­ern­ment’s Eco­nomic Trans­for­ma­tion Pro­gramme (ETP) the Se­cu­ri­ties Com­mis­sion Malaysia (SC) has been charged to es­tab­lish the Pri­vate Re­tire­ment Schemes (PRS) as the third pil­lar of Malaysia’s pen­sion frame­work. PRS forms an in­te­gral fea­ture of the pri­vate pen­sion in­dus­try with the ob­jec­tive of im­prov­ing liv­ing stan­dards for Malaysians at re­tire­ment through ad­di­tional sav­ings of funds. The PRS com­ple­ments Malaysia’s manda­tory re­tire­ment sav­ings schemes and are vol­un­tary long-term in­vest­ment schemes de­signed to en­hance ad­e­quacy of sav­ings for re­tire­ment. While many insurance com­pa­nies have rolled out var­i­ous re­tire­ment prod­ucts aimed at help­ing in­di­vid­u­als plan for re­tire­ment, th­ese are mostly bun­dled prod­ucts, com­pris­ing of a com­bi­na­tion of insurance cov­er­age, sav­ings or in­vest­ments. For PRS, the fo­cus is pri­mar­ily on grow­ing an in­di­vid­ual’s con­tri­bu­tion in their cho­sen fund. This means that the money will be put to work with no other ob­jec­tive than to build funds for re­tire­ment.

Re­tire­ment Plan­ning with PRS

As the cen­tral ad­min­is­tra­tor for the PRS, one of the Pri­vate Pen­sion Ad­min­is­tra­tor’s (PPA) main func­tion is to cre­ate aware­ness and ed­u­cate the pub­lic on how to mit­i­gate the prob­lems aris­ing from in­ad­e­quate, in­suf­fi­cient funds (due to longer life ex­pectancy) and in­fla­tion in or­der to be free from old age poverty. PRS is a so­lu­tion that is de­signed to help Malaysians to save, in­vest and en­joy their re­tire­ment. It is not about sac­ri­fic­ing cur­rent spend­ing but it is about set­ting aside a des­ig­nated fund for fu­ture spend­ing. What sets PRS apart from other in­vest­ment tools is that it is a vol­un­tary long-term in­vest­ment scheme de­signed to help in­di­vid­u­als ac­cu­mu­late sav­ings for re­tire­ment, des­ig­nated only for re­tire­ment and with­drawal only when you re­tire. It takes time to ed­u­cate. We can­not af­ford to stop ed­u­cat­ing the pub­lic es­pe­cially the work­ing pop­u­la­tion on the im­por­tance of hav­ing ad­e­quate funds to en­joy re­tire­ment. The World Bank statis­tic shows that in or­der to live com­fort­ably with­out com­pro­mis­ing the stan­dard of liv­ing or down­grad­ing life­style, a per­son needs twothirds of last drawn salary as re­place­ment in­come when re­tire. The beauty of the PRS is it is flex­i­ble to choose or switch providers and funds based on risk ap­petite and an­tic­i­pated re­turns. There are also de­fault funds de­signed based on age groups for con­trib­u­tors who do not want to be in­volved in the process of fund choos­ing.

It takes time to ed­u­cate. We can­not af­ford to stop ed­u­cat­ing the pub­lic es­pe­cially the work­ing pop­u­la­tion on the im­por­tance of hav­ing ad­e­quate funds to en­joy re­tire­ment. For those who are be­low 40, with the ob­jec­tive of grow­ing your funds and make the money work harder for you, you can opt for ag­gres­sive funds with higher risk. If you are in your 40s to 50s, the fund should be help­ing you to gain a cer­tain per­cent­age of growth while gen­er­at­ing steady in­come at mod­er­ate risk. Mem­bers who are above 50 are ad­vised to be more con­ser­va­tive in their risk-tak­ing and seek a fund which can of­fer a re­turn that beats the in­fla­tion rate. If you are look­ing for di­ver­si­fi­ca­tion to dif­fer­ent re­gion of in­vest­ments, as­set classes and as­set al­lo­ca­tion, by all means talk to the PRS Providers. They will help cater to your re­tire­ment needs and ad­vise which fund is suit­able for you. PRS is vol­un­tary and as such, it does not limit for your con­tri­bu­tion to a sin­gle provider or a sin­gle fund. How­ever, mem­bers are en­cour­aged to take ad­van­tage the ben­e­fit of “dol­lar cost av­er­ag­ing” in or­der to re­duce mar­ket risk through sys­tem­atic and reg­u­lar con­tri­bu­tions at pre­de­ter­mined in­ter­vals (monthly) and set amounts. In line with our motto of “We are here for you”, PPA of­fers PRS mem­bers cen­tral ad­min­is­tra­tion of their con­sol­i­dated PRS ac­count. Through PPA online por­tal, mem­bers can log in to their ac­count to mon­i­tor their in­vest­ments with all Providers as well as check the per­for­mance of all PRS funds. This ser­vice is avail­able 24/7. Last but not least, a tax relief of up to RM3,000 is given by In­land Rev­enue Board to en­cour­age vol­un­tary con­tri­bu­tions in PRS. While the tax in­cen­tive is a sweet­ener to mo­ti­vate PRS con­tri­bu­tions, Malaysians need to re­alise the big­ger is­sue which is the im­pend­ing in­come re­place­ment prob­lem of in­ad­e­quate and in­suf­fi­cient funds for re­tire­ment. What the pub­lic need to be aware of is how much they need to save and in­vest to re­place two-thirds of their last drawn in­come be­fore they re­tire. Oth­er­wise, they may not be able to con­tinue liv­ing their life­style that they have been ac­cus­tomed to. Re­mem­ber PRS is a ded­i­cated and dis­ci­plined re­tire­ment fund­ing so­lu­tion. PRS is not only to meet the pub­lic’s need to ac­cu­mu­late funds for re­tire­ment but also to meet the needs of re­tire­ment in­come plan­ning. PRS also caters for the re­tiree mar­ket where in­di­vid­u­als have the need to con­vert their long re­tire­ment sav­ings to an in­come stream that will pro­vide monthly in­come for the du­ra­tion of their re­tire­ment years. Since the first PRS fund was launched in Novem­ber last year, the re­sponse to­wards PRS has been en­cour­ag­ing. We have achieved wide­spread aware­ness since Fe­bru­ary this year in which there are peo­ple in­vest­ing in PRS in ev­ery state of the coun­try. I’m glad to say that more Malaysians now are aware that they need to bet­ter pre­pare for their re­tire­ment and know how to plan well to achieve their dream re­tire­ment.


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