If you're facing financial hardships due to the COVID-19 pandemic and in need of extra cash to pay the bills, you might want to consider withdrawing your money from EPF under the i-Sinar facility. Read this article to find out the pros and cons of withdrawing money from your EPF account.
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If you have been following the news, you may have heard that The Employees Provident Fund (EPF) i-Sinar facility applications for category two had opened on Monday this week.
The facility was introduced early last December by the EPF as an attempt to cushion the financial blow of the COVID-19 pandemic on Malaysians following a proposal by Finance Minister Tengku Zafrul Abdul Aziz to allow targeted EPF contributors to take out an advance from their EPF Account 1.
Through the facility, which expects to benefit half of its 14 million contributors, members can withdraw up to RM60,000 from their account one. Despite the convenience offered, the facility is not a withdrawal or a form of 'free cash' because EPF members still need to replace the funds later.
Though the i-Sinar facility is a helpful initiative by the Government to aid Malaysians, especially those who were made unemployed or have experienced a pay cut, the subject has been under much scrutiny from various parties including think tanks, financial councils, and EPF themselves. Without a proper guideline on the risks and opportunities, it may not be entirely clear to the public if withdrawing the cash is a wise or strategic move.
After all, the money is meant for retirement when one is no longer able to sustain themselves via a paying job. On top of that, EPF is a relatively stable vehicle to keep your cash for the long-term. If you didn't already know, they are required, by law, to pay yearly dividends of at least 2.5% to its members!
Between needing instant cash and saving for your future, it may be a tough call to make. And honestly, the answer is not as straightforward either, so to help you make a comprehensive assessment of your situation, we list down the pros and cons to withdrawing money from your EPF as part of the i-Sinar facility.
Disclaimer: this is not a professional recommendation, but a simple guide and reference point.
Pros
1. If you are drowning in debt and need instant cash, this could be your temporary solution!
How instant you ask? Of course, this does not mean the cash will be deposited into your account overnight or even in two weeks, but it could be available by mid-January 2021 for category one applicants and by the end of the following month for category two applicants, according to the EPF. Bear in mind that it will take the Government agency at least two to three weeks to notify a member's application status upon submission.
You should consider applying for the i-Sinar facility if you were among the unfortunate thousands to get retrenched or suffered from loss of salary and income because of the movement restrictions and don’t have enough savings to sustain your livelihood.
The fact of the matter is that the pandemic has affected the livelihood of many Malaysians. Quarantine and lockdown orders have slowed down the economy, forcing businesses, particularly the small and mid-size enterprises to shut down or limit operations and affects employees who are either forced to accept pay cuts or go on unpaid leaves to balance out the company’s books.
Other individual scenarios that could benefit from the facility are those experiencing cash flow issues or have sufficient savings. This means you can't service your debts, pay off bills, or fund necessities. According to the World Bank, Malaysia has one of the lowest rates of household savings in the world.
Things may not be rosy right now, but the good news is that the Ministry of Finance's (MoF) projects a decrease in the unemployment rate to 3.5% in 2021 from the estimated 4.2% in 2020, subject to the recovering status of the economy.
2. Avoid signing up for more debt to pay off existing debts
Even without the Movement Control Order (MCO), everyone wants to become debt-free fast, but clearing it off can be a long and challenging journey if you have multiple loans here and there. But wanting to get out of debt quickly, is even more relevant now than ever, especially as lockdown measures have been reinstated. The sooner we clear off our debt, the less interest we will accrue over time.
With the i-Sinar facility, you will get to pay off your debts without worrying about taking on more debt or accumulating interest, because it is, after all, a government facility. You also do not have to worry about increasing your debt service ratio, credit utilisation or possibly taking a hit on your credit score, all the factors that may affect your creditworthiness. However, you would be trading the advantage interest that you would have gotten on your savings.
Related: Ultimate Guide To Credit Scores
In comparison, without the i-Sinar facility, other ways you could get out of debt is through debt facilities. This method will require you to take on more debt (as the name suggests) to quickly get out of debt.
There are usually two ways to leverage on debt facilities. The first is to negotiate with the banks to convert your high-interest credit card debts into a term loan or consider a balance transfer. As the name suggests, it allows the credit card holder to "transfer" the outstanding owing on their credit card(s) to a new credit card and split the payment to monthly instalments. But this method is only applicable to credit card debt.
Related: 3 Methods to Clear Your Debts
Another method to clear off your loan debt is via a debt consolidation loan. A variation of a personal loan, it runs similarly to a balance transfer, but the sole purpose of this loan is to consolidate all your existing debt (regardless of the type of debt). The great thing about personal loans is that unlike the high-interest rate of credit cards, personal loans have a much lower interest fee, and their payment may be extended for many years so you can take your time to pay it off.
Lastly, you could look for side jobs to earn side income to help bolster your finances. It will require you to work extra hours (like taking on a part-time job). But in these trying times, side-gigs and part-time jobs like freelancing, online tutoring, delivery jobs, dropshipping, starting a small online business, may not be such a bad idea.
3. Cash from i-Sinar could cover other expenses beyond loan repayments
When budgeting, it's important to remember that our expenses are not just loan repayments such as mortgages, car loans, personal loans, credit cards. We also need to consider other expenses used for utilities, necessities, telco, transportation, groceries, childcare, Internet and more. These are all necessary expenses that cannot be deferred through a government assistance programme like the targeted moratorium. Hence, here is where the i-Sinar facility money could be well utilised.
Under Budget 2021, the other government assistance programme offered for individual B40 and M40 borrowers, as well as businesses to service their debts, is the targeted moratorium. This assistance gives borrowers the option to postpone monthly instalments for three months, or reduce the monthly instalment by 50% for a period of six months; it will take effect from April to September this year.
Additionally, if you still experience financial difficulties at the end of the targeted moratorium period, other forms of targeted repayment assistance are still available by the banks until June 2021.
Cons
1. Earn fewer dividends and miss out on the effects of compounding interest, which means lesser savings in your retirement fund
Established by the Government in 1991, the EPF scheme helps Malaysians save parts of their money into a retirement savings fund. This mandatory contribution (for private agencies) is to encourage savings among Malaysians.
As with just any savings fund, the benefit of putting our money in EPF is the dividends and the compounding interest that you could accumulate over the years. Some members even opt to invest their money into unit trusts, which could offer higher returns.
So say you do withdraw money from your EPF, you could potentially miss out on both the yearly dividends (returns) and the extra returns from compounding interest (accumulated returns) on your savings.
Let’s use an example to illustrate this:
Say Ali has RM50,000 in his EPF savings account, and his monthly EPF contributions is 9% of his RM5,000 salary at a fixed dividend rate of 5%. In a year, his annual contribution to EPF will amount to RM5,400.
The below table explains how Ali’s savings may grow from RM50,000 in his first year to RM141,439 after 11 years thanks to dividends and compound interest.
| Years | Current retirement savings (RM) | Annual contribution (RM) | Dividends received (RM) | Retirement savings (RM) |
| 1 | 50,000 | 5,400 | 2,216 | 57,616 |
| 2 | 57,616 | 5,400 | 2,521 | 65,537 |
| 3 | 65,537 | 5,400 | 2,837 | 73,774 |
| 4 | 73,774 | 5,400 | 3,167 | 82,341 |
| 5 | 82,341 | 5,400 | 3,510 | 91,251 |
| 6 | 91,251 | 5,400 | 3,866 | 100,517 |
| 7 | 100,517 | 5,400 | 4,237 | 110,154 |
| 8 | 110,154 | 5,400 | 4,622 | 120,176 |
| 9 | 120,176 | 5,400 | 5,023 | 130,599 |
| 10 | 130,599 | 5,400 | 5,440 | 141,439 |
| 11 | 141,439 | 5,400 | 5,874 | 152,713 |
2. Paying the advancement back in full may take a long time
If you plan on taking the advancement because you experienced a pay cut or got retrenched, chances are you will not be earning the same or more in the next few months to be able to “replenish” your EPF account soon. If you do lose your job, chances are you will remain jobless for a while unless you are lucky enough to secure a job again within the next few weeks. Securing a job or getting your normal reinstated are two things that may not be within your locus of control.
When you don't replace the funds in your account, in full, as soon as possible, you won’t get to capitalise on the interest.
On top of that, you will need to put in double the effort to replace the money that you took out as its value most likely had increased by a large margin over time due to compounding interest.
Weigh the pros and cons, and understand the risks before applying for a withdrawal. Don’t be easily swayed by the availability of extra cash.
Having extra cash on hand can be tempting when you are in desperate need of cash to pay off unpaid expenses and loans.
On the one hand, for some, it is a safer alternative to opt for i-Sinar than to turn to informal and risky channels like loan sharks. On the other hand, it may be a more strategic choice to depend on your savings or emergency fund until you secure another job because withdrawing all that money is a waste of the effort and discipline you took to save up and build your wealth.
Now more than ever, you need to put your financial literacy skills to the test. We wish you good luck and hope you make the right choice!
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