Save with retirement in mind
Taking a look at the PRS – how it works, its benefits and risks.
WITH retirement still a good 30 years away, saving up for it is not something which Amanda (not her real name) constantly thinks about.
In fact, the 30-year-old college lecturer admits she hasn’t thought much about it.
“Don’t get me wrong. I do believe in savings and I save a good portion of my salary every month. But I’ve never really thought of putting aside money specifically for my retirement.
“Retirement seems so far away. Right now, it’s saving up to buy a car, or a house, things like that. But I know a lot of people say relying on your EPF (Employees Provident Fund) money alone may not be enough, so I am open to more savings options,” she says.
Amanda says she has heard of the Private Retirement Scheme (PRS) but is not too familiar with it.
Launched in July by Prime Minister Datuk Seri Najib Tun Razak, the PRS is a voluntary scheme which will allow employees and the self-employed above the age of 18 to save for their retirement. There is no maximum age for contribution.
To encourage savings under the scheme, individuals are granted tax relief of up to RM3,000 (for first 10 years) and employers are provided with tax deduction on contributions to the PRS on behalf of their employees above the statutory rate of 19%.
The scheme is available via eight providers
Start now. Even if you’re 50, it’s pretty late, but do it now because it’s better than when you’re 51. The effect on your life will be so much better. — J. CAMPBELL TUPLING
– AmInvestment Management; American International Assurance; CIMB Principal Asset Management; Hwang Investment Management; ING Funds; Manulife Asset Management; Public Mutual; and RHB Investment Management. Running the PRS is the Private Pension Administrator (PPA), under which all accounts are consolidated. Parameters set by the Securities Commission (SC) require all providers to have three core funds – Growth (<40 years old), Moderate (40-50 years old) and Conservative (>50 years old).
All PRS investments, regardless of provider, will be split and maintained into two sub-accounts under the PPA – 70% into subaccount A (which can only be withdrawn upon reaching retirement age) and 30% into sub-account B (which can be withdrawn once a year for any reason subject to a 8% tax penalty). So how exactly does the PRS work? CIMB Principal Asset Management chief executive J. Campbell Tupling says it is all about choices.
“For someone who is not comfortable with making the analysis, or who just wants to leave it to the professionals to do it, we would default you into one of the three funds (Growth, Moderate or Conservative), based on your age.
“But for those who want to do it themselves – they have a better knowledge on investments, what the risks are – they can make their own choices. So even a younger person can choose the most conservative fund if he wants to (and vice versa),” he says of the CIMB-Principal PRS Plus product.
The difference is in how the money is invested.
(SC guidelines stipulate a maximum which can be invested in equities – 70% for Growth Fund, 60% for Moderate Fund and 20% for Conservative Fund. For the Conservative Fund, 80% of the investments must be in fixed income instruments. Offshore investments are permitted for the Growth and Moderate Funds, but not for the Conservative Fund.)
Tupling adds that for those who are keen to go into more aggressive investments, CIMB also offers two additional funds – a 100% domestic equity fund and a 100% regional equity fund.
“You could also choose a mix of these funds. You can put 20% in each of the five funds, or 90% in one fund, and 10% in another fund. It’s about what you’re comfortable with,” he says.
He adds that CIMB is also offering five corresponding syariah-compliant funds under the PRS.
Products which are also available in the market currently are the Hwang PRS Solutions (three core funds plus a syariahcompliant fund), and the Manulife PRS Nestegg Series (three core funds).
Other products that will soon be launched include the OnePRS (by ING Funds – three core funds, two syariah-compliant funds, plus a high-growth fund which will invest up to 95% in equities), AmPRS (three core funds by AmInvestment Management), and Public Mutual PRS (three core funds and three syariah-based funds).
The majority of these funds require only a RM100 minimum sum to open an account, if the investor opts for regular savings. However, being voluntary in nature, the amount and interval is not fixed for PRS contributions.
Hwang Investment Management chief product officer Steve Lim says the main benefit of the PRS is that it is a supplement to the EPF.
“For savers who want to take a bit more risk, PRS gives you that avenue. For EPF, you can’t take control of your own investment. EPF pays you whatever rate they can derive from that portfolio, which is slightly over 5% (in dividends).
“But for those who have just entered the
workforce, and have another 20 to 30 years of working life, they might not want (returns) to be confined to 5%. They might be looking for 8% to10% returns for their investments. For the aggressive portfolios, I think it’s only fair that they are compensated with higher returns,” he says.
Since launching their product at the end of October, Lim says Hwang has hit RM1mil in sales with a majority of the accounts investing in the Moderate and Growth Funds.
Mobility is another major benefit offered under the PRS, says ING Funds Bhd executive director and acting chief executive officer Ismitz Matthew de Alwis.
“When you look at insurancebased policies, once in, there is no out. Under the PRS, today you may open an account with me and as the fund grows, you may want to expand. Or say if one provider is not doing too well, and you want to move, you can do so.
“Also, people go through different cycles in life.
“There may be times in your life when you are not able to pay (for your policies). For many other insurance policies, you are committed to pay. If you stop paying, your policy may not be in force anymore. Here, you can take a break if you need to do so for whatever reason,” he says.
He adds that under SC regulations, the PRS products will have one of the lowest cost structure compared with other retirement products in the market.
“Everything will be very transparent. Everything has to be disclosed in the disclosure document,” he says.
What are the returns like compared to EPF’s?
Manulife Asset Management chief executive officer Edward Ooi says that the topic can be very subjective.
“Let me give you a simple example. Last year, EPF gave out 6% dividends, and everyone was happy because the stock market returns (KLCI) was only at 0.78%.
“That was for 2011. But if we stretch it to two years (2010 and 2011), EPF pays 5.9% annualised returns, but the stock market combined gave 9.67% annualised returns. So when you look at investment, don’t look at the short-term. You have to look at it from medium to long-term,” he explains.
AMMB Holdings Bhd Retail Funds director Ng Chze How agrees.
“You cannot compare apple to orange. EPF’s investment objective is very clear. But PRS offers various investment objectives. I’m sure eventually some will outperform and some may not perform as well,” he says.
Even in a quick comparison with unit trust funds, Ooi says the PRS differs because of the long-term nature of the investment.
“You are not allowed to take out most of your investment until you retire. Even in unit trust, there is always that element of greed and fear which will cause individuals to withdraw their funds in the shortterm, causing them to miss out on long-term opportunities,” he says. What are the risks? Just as with any investment, there are risks – funds invested under the PRS are not capital protected and there is no minimumreturns guaranteed.
“Definitely, as with all investments, there is market risk. But here, we don’t expect people to churn over short-term. We expect people to stay invested over the long-term, and the PRS should be able to weather the market cycles. That would mitigate a lot of the risk element at play,” says de Alwis.
He adds that as the investments are held under a trustee, they would be fairly secure.
“Tomorrow a provider may go into liquidation or have a winding up petition. But the assets will not be affected because they are totally separated from the manager’s assets.
“The money that is invested in this is held by a trustee. The trustee can also go bust, but the money can be moved to another trustee. So the investment is protected,” he explains.
The providers say it is time for Malaysians to start looking beyond their EPF to ensure they have enough savings to last their golden years.
Figures released by EPF earlier this year showed that 62,358 contributors who turn 55 this year only have an average savings of RM150,000 each with EPF.
“If you’re looking at using RM12,000 a year (RM1,000 a month), that will last you a little more than 10 years,” says de Alwis. Pointing out that given the average Malaysian lifespan of 75 years, most Malaysians would have another 15 to 20 years post retirement.
And for Tupling, there is no better time than now to start saving.
“Start now. Even if you’re 50, it’s pretty late, but do it now because it’s still better than when you’re 51. If you’re 25, start now. The effects on your life will be so much better.
“The earlier you get started on having some savings, even if it is only RM50 or RM100 a month, get started. This is the single best piece of advice I can give anybody. And the second would be, ‘Stick with it’,” he concludes.