On April 16th, the Malaysian Employee Provident Fund or EPF announced the upcoming rollout of a new account structure. Briefly, this new structure, poised for implementation in May 2024, involves the creation of a third account for all EPF members.
Previously, all contributions from EPF members were divided into two accounts. 70% of the contributions would go into Account 1 (Akaun Persaraan) while the remaining 30% would be invested into Account 2 (Akaun Sejahtera).
The funds in Account 2 can be withdrawn before age 55 for certain purposes such as to fund education, housing and healthcare. On the other hand, the funds in Account 1 cannot be withdrawn until one reaches the age of 55, at which time they are assumed to have retired.
Upon reaching age 55, an EPF member's funds in both Account 1 and Account 2 will be combined into one account, and they can make a full or partial withdrawal.
How Does EPF Account 3 Work?
Starting from May 2024, a third account will be created for members and contributions will be redistributed among the three accounts. 75% of contributions will be directed to Account 1, 15% to Account 2 and 10% to Account 3.
Account 3 will start with a zero balance and will only receive 10% of the contributions received from May 2024 onwards.
Account 3 has been created to allow flexible withdrawals by members. This means that you can withdraw from Account 3 at any time, much like a savings account. There are no limitations for your withdrawal, unlike Account 2 which requires withdrawals to be spent on specific purposes.
Account 3 is also meant to replace the targeted withdrawals that the government put in place during the recent Covid-19 pandemic period.
Drawbacks to EPF's Account 3
The newly restructured EPF contribution plan has no doubt drawn mixed reactions, with many groups fearing that Account 3 will result in wasteful and irresponsible behaviour on the part of members.
On a macro level, many pundits are also concerned that Account 3 balances will not be subject to the same EPF interest payouts as Account 1 & 2.
This means that anything you have in Account 3 will not be earning the same interest rates that Account 1 & 2 balances are earning ( the most recent rate being 5.5% declared for 2023). Local media has reported that only a 'token payment' will be made for Account 3 balances.
This may lead to certain individuals being discouraged from seeking full-time employment and contributing to the EPF, resulting in workforce labour shortages.
Benefits of EPF Account 3
Despite the doom and gloom that many netizens are painting, not everything about Account 3 is negative. As long as you employ the right strategies, you can make Account 3 beneficial for you and your lifestyle. Here are some ways to start:
Transfer Within EPF
If you would like your Account 3 balance to earn as much as EPF Accounts 1 & 2, you can always withdraw and transfer them to these long term investment accounts. Follow us as we bring you updates on how this can be done, as more details will be announced in the coming weeks and months.
More Investment Flexibility
For some members, the annual interest rates generated by EPF is sufficient. In recent years they have fluctuated between 4%-6%, and have generally been quite consistent over the years.
However, there may be individuals who believe their investments can generate better returns. These people now have the option to withdraw their funds from Account 3 and place them wherever they see fit. Various examples of investments to consider include Unit Trusts, Real Estate Investment Trusts (REITs), Shares, and many more.
Start Your Own Side Business
If you have a skill that's in-demand, Account 3 gives you the flexibility to start your own enterprise. It can be something simple like baking and catering, or a more technical skill like strategizing and consulting.
Whatever your passion is, you now have the flexibility of taking capital out from your own EPF savings and funding your dreams. For some, this can be a better option that taking a loan as it doesn't require repayments nor does it incur any additional loan interests.
Flexibility in Times of Crisis
Many of us still remember (or are still experiencing) the financial uncertainties and stress that came with the Covid-19 pandemic. With the presence of Account 3, members have more flexibility to cover their financial needs during challenging times, such as when their business suffers or they lose their job.
The flexibility of Account 3 also allows for emergency spending, especially those not covered under the limitations of Account 2 withdrawals.
Financial Literacy and Prudence Can Help Grow Wealth
With that being said, it is up to each individual to manage and grow their own funds to ensure a smooth transition to retirement. In any case, it helps to find ways to save and invest wisely.
EPF is only one way you can grow your personal wealth for your retirement. You can also explore various other retirement-centric investments and savings schemes including products by insurance providers and wealth planning agencies.
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