The word “Retirement” for many Malaysians seems like a dream come through for them. However, if we didn’t plan well and early enough, retirement will be a nightmare for us. Given the escalating cost of living and higher inflation rate, many Malaysians who are approaching retirement age may find it miserable to retire with their desired lifestyle post-retirement. Whether you want to be continuing working or not post-retirement age, is very much depends on how well you prepared for your retirement funds.

When talking about the retirement funding method that Malaysian can choose from, we have Private Retirement Scheme (PRS) and Deferred Annuity, in which both of them also entitle you up to RM3,000 tax relief. The tax relief entitlement makes this two planning methods even more attractive for retirement planning purpose. However, which one is better suits you?

First, PRS is under the governance by Securities Commission of Malaysia while deferred annuity by Bank Negara Malaysia. It’s all started when government make the announcement on the tax incentive during Budget 2011. Then since year 2012, this topic heats up the financial market when the first PRS was launched and at the same time insurance companies also were starting to come out with some attractive features on their deferred annuity plans.



What are the differences?

For PRS, it’s an investment plan issued by asset management companies, where a contribution is similar to unit trust cash investment. After contribution, your money will be separated into two accounts, sub-account A (70%) and sub-account B (30%). Currently, there are 8 PRS providers namely:

– Affin Hwang Asset Management Bhd,
– AIA Pension and Asset Management Sdn Bhd,
– AmInvestment Management Bhd,
– CIMB-Principal Asset Management Bhd,
– Kenanga Investors Bhd,
– Manulife Asset Management Services Bhd,
– Public Mutual Bhd,
– RHB Asset Management Sdn Bhd;

As for deferred annuity, it’s basically an insurance plan issued by insurance companies and will invest the money for you and guaranteeing a stream of income to you after certain years. Annuity refers to the stream of income here.

For ease of comparison, let us break it down into the following key features:

– Tax Relief Entitlement
Yes. Both plans also entitles you combined up to a RM3,000 tax relief per year. This is on top of your other tax relief category since year of assessment 2012, such as EPF contributions and life insurance premium. Currently, the tax relief given is for 10 years (from year of assessment 2012 until 2021).

– Income / Return
The return for PRS is depends on the performance of the fund(s) that you chose, meaning no guaranteed minimum return. Meanwhile, for deferred annuity plan, you may entitle for some guaranteed income for certain period depending on how much and how long contributions you made and also your entry age.

– Flexibility of contribution

Both plans are on a voluntary contribution basis to complement our EPF savings. But, in terms of flexibility, once enroll into a deferred annuity plan, there is a minimum years of contribution must be made, for example a minimum of 10 years. If you stopped contributing halfway, the amount you can get back is lesser than the amount you already contributed. And if the plan has acquired a surrender value, insurance company may grant an automatic premium loan to sustain the policy. An interest rate of 5%-7% will be charged on this loan. The policy will be lapsed after there is no more value.

Whereas for PRS, contributors can make their contributions anytime and with any minimum amount set by different PRS providers. Generally, it’s just a mere minimum of RM100 per subsequent contribution. PRS has a full flexibility in terms of contribution.

– Flexibility of withdrawal / surrender

For deferred annuity, a contributor can surrender the plan in total anytime, but will subject to tax penalty if you did so before the payout period set. Meanwhile, a PRS contributor can only withdraw their money from sub-account B, after one year, and be subject to tax penalty also if before the retirement age set (currently set at age 55).

However, if you are making withdraw only after retirement age (for PRS) or according to payout period set (for deferred annuity), there will be no tax penalty to be imposed. Please be mindful that both plans are for retirement planning purpose and you already entitle for the tax relief when contributing.

That’s why it is very logic for IRB to claim back some to discourage contributors to withdraw money pre-mature. And, this is also a way to prevent loophole on taxation issue.

– Tax Penalty on withdrawal amount before payout period / retirement age

Yes. As mentioned above, an 8% tax penalty will be imposed for premature withdrawal as highlighted. It will only be deducted from the amount you wish to withdraw from PRS sub-account B.

As for deferred annuity, the 8% tax penalty will be calculated based on the total premiums paid which were eligible for tax relief earlier. Such tax penalty deducted will be paid to Inland Revenue Board (IRB) by the PRS provider or insurance company.

Anyway, there are some exemptions from the 8% tax penalty whereby contributors can withdraw partial or full amount due to the following reasons such as death, total and permanent disablement, suffering from serious disease or permanent departure from Malaysia (only for PRS).

– Partial withdrawal / Partial surrender

You can partially withdraw up to the amount available inside your PRS sub-account B, after your first year contribution. As for deferred annuity plan, you are not allowed to partially surrender the plan. However, if you really want to cash out some money from your plan, you can request for premium reduction. By doing so, provided your policy has acquired cash value, you may get back some money calculated based on the amount reduced in annual premium. Please be mindful that once revised, the guaranteed income (if any) will also be revised and reduced accordingly.

– Service charge

This is very important because whatever amount you saved from these charges will enhanced your retirement funds savings straightaway. For PRS, all PRS providers are given the flexibility to charge contributors a service charge of between 0%-3%. It was considered very attractive comparing to normal unit trust fund service charge of 5%-7%. Some providers even charge 0% service charge for PRS. You may shop around for the best PRS deal.

Meanwhile, for deferred annuity, it’s all factored inside the premium amount. If we break it down and compare with the same service charge applied, insurance companies generally charges a 5% service fees before allocating balance amount into the underlying funds chosen.

Flexibility to transfer / change plan
Another unique for PRS is the existence of Private Pension Administrator (PPA) which was formed to monitor and administer the entire scheme together with an consolidated PRS statement also provided by PPA. Because of this structure, PRS contributors can switch or transfer freely and conveniently with minimal cost from one PRS provider to another.

However, this is not available for deferred annuity plan. Policyholders cannot change their annuity plan from one insurance company to another.

– RM500 PRS Youth Incentive
There is one more advantage which is available for PRS only. On top of the tax relief given, government is generous enough to come out with another added RM500 incentive targeted specifically for youth in order to encourage young working adults start planning and save early for their own retirement. This was announced during Budget 2014. To qualify, an eligible PRS contributor must be a Malaysian aged between 20-30 years old (have not reached the age of 31) during the effective period of 2014-2018. With a minimum of accumulated RM1,000 PRS contributions made within a calendar year during the effective period, government will contribute a one-off incentive of RM500 worth of units into your PRS sub-account A.

– Insurance Agent vs PRS Consultant
By now, you should know the differences better. Insurance agents argue that deferred annuity is better because of the commitment of paying premium. They claimed that deferred annuity plan is better in cultivating the savings habit of an individual. In the end, we are talking about how disciplines are we on saving for retirement. Agreed? By the way, PRS consultants may argue that the guaranteed income from deferred annuity plan is limiting the upside potential of our money to grow. Investment return from PRS although was not guaranteed, but it doesn’t limit the upside potential that can be generated by a PRS fund over long term. And, if we look at investing for a long-term period, contributors can ignore the short-term volatility.

CONCLUSION
In the end, which one is the better option for you is very much depends on what kind of features are you considering. Are you a self-discipline person? Does guaranteed income something you want? Then, do you mind to sacrifice your upside potential return in exchange for that guaranteed income? Do you want to grab the RM500 youth incentive available?

Anyway, why limit yourself to choose either one? You can enroll yourself in both PRS and deferred annuity plan. Moreover, the tax relief given was just an incentive for you to kick-start your retirement savings. And, honestly, even though you saved RM3,000 yearly, it’s still insufficient to accumulate enough savings for your retirement. In the end, you are advised to consult a financial planner to find out how much retirement funds is needed, then come out with a proper plan.

Again, it’s crucial for us to start planning for our retirement early and start taking action now. If no action was taken, no matter how good is the plan, it boils down to just a plan for you to see. There is nothing such as “too early” or “too young” to start saving for retirement. Whether you will be suffering or enjoying your retirement life, you can determine the outcome from now onwards. You can make the difference. So, let’s act now before it is too late.

Save, Invest and Enjoy your Retirement.

This article is written by Mr. Alex Yeoh (RFP, Bachelor of Engineering), a licensed financial planner from VKA Wealth Planners Sdn Bhd. It has been published on Financial 1st, a quarterly industry publication by Malaysian Financial Planning Council (MFPC) on financial planning since year 2006.