Employee Provident Fund (EPF) Malaysia
In Malaysia the Employee Provident Fund is a program that allows people to accumulate savings for retirement in Account I and accumulate for living expenses such as housing, education and healthcare expenses in Account II. While the calculation of the EPF is fairly straight forward, the handling of these savings present some challenges when doing long term planning.
For purposes of the PlanPlus Planit, the approach we take is to only recognize the EPF Retirement contributions into Account I as savings for long-term goals. The employee contributions to Account II are treated like normal lifestyle style expenses and thus are not entered as specific expenses.
When it comes to the employer contributions to the EPF accounts, our approach is to enter the employer contribution to the EPF Account I as a savings amount on the savings screen and enter the employer contributions to Account II as miscellaneous income since these contributions are in fact like additional income for the employee to fund their lifestyle expenses.
Let’s look at some actual screen shots that illustrate this approach.
EPF Retirement Savings (Account I)
1. Enter the employee contribution to EPF Retirement Savings in the Detailed Cash Flow screen.
- Using a client income of 300,000 RM the contribution would be 300,000 x 11% x 70% = 23,100 RM
- Using a spouse income of 180,000 RM the contribution would be 180,000 x 11% x 60% = 13,860 RM
When you enter these EPF Retirement Savings on the detailed cash flow screen, they will appear on the summary Cash Flow Management Screen as seen here:
2. To include the employer contribution to the EPF Retirement Savings in the long-term projections, enter the employer’s contribution on the Savings Screen. To do this, click “Edit” on each of the EPF Retirement Savings records
This will open the record and give you access to the “Employer Amount” field.
- Using a client income of 300,000 RM the employer contribution would be 300,000 x 12% x 70% = 25,200 RM
- Using a spouse income of 180,000 RM the contribution would be 180,000 x 12% x 70% = 15,120 RM
Once you have entered the Employer contributions for the Client and Spouse, the Savings Screen illustrates both the Employee and Employer contributions as seen below.
EPF Account II Employer Contributions
As explained above, we only recognize the employer contributions to EPF Account II since we need to recognize this additional cash flow to fund living expenses. We enter these under “Miscellaneous Income” on the Detailed Cash Flow screen.
- Using a client income of 300,000 RM the employer contribution would be 300,000 x 12% x 30% = 10,800 RM
- Using a spouse income of 180,000 RM the contribution would be 180,000 x 12% x 30% = 6,480 RM
Below you’ll see the entries for these amounts:
The Account II contributions will appear on the summary Cash Flow Management Screen as part of the total Income number.
Transfers from EPF Account II to EPF Retirement Account I
If in the future the client was to accumulate surplus savings in the EPF Account II and they wish to illustrate these surpluses being transferred into EPF Retirement Account I, this can be done as a future savings entry on the Savings Screen.
EPF Tax Relief’s
Contributions by the employee to the EPF program are tax deductible up to a maximum deduction of 6,000 RM. This deduction also includes reliefs for life insurance premiums.
The way this is being handled in the PlanPlus Planit is that we look at the employee’s contributions to the EPF Retirement Account I (23,100 RM and 13,860 RM as seen above) and include a relief in the tax calculation for the employee’s EPF Retirement Savings amount or 6,000 RM, whichever is less.
One impact of this approach is that there may be occasions where a client or spouse’s income is less than 77,922 RM which is the amount of income required to generate an employee EPF Retirement contribution of 6,000 RM. In this case, if you wish to ensure that the full 6,000 RM relief is included, you would have to enter a manual relief on the detailed cash flow screen for the difference. For example, if the income was only 50,000 RM and the employee EPF Retirement Account I savings were only 3,850, you would enter an additional relief of 1,650 to recognize the contributions to the EPF Account II. (50,000 x 11% x 30% = 1,650).
The approach that’s used in the PlanPlus Planit was taken in order to keep the process flexible enough to allow advisors to recognize only those portions of the client’s income that are eligible for the EPF contribution formula. Since a number of different income types do not form part of the EPF contribution formula, this approach allows you to identify exactly what the contributions are. It also allows us to recognize that only the portion of the savings that are in the Retirement Account I are truly for retirement while the Account II funds are primarily for living expenses. With the ability to do a special savings entry to transfer money to the Retirement Account I from Account II, you can reflect long-term accumulations in this second account that will ultimately be available to fund long-term goals.
Brief Concept about EFP
- EPF – Employee Provident Funds are compulsory contributions by an employee and employer. Please click http://www.kwsp.gov.my/portal/en/about-epf/overview-of-the-epf
- Contribution percentage: Employee 11% , Employer 12% - 19 % .
- There are 2 accounts. EPF I -70% and EPF II – 30%
- EPF I – when you reach certain threshold, according to the age, you can withdraw very 3 months to invest in Unit Trust or shares. This is for retirement purpose. Even you withdraw to investment, upon redemption of investment, it will go back to EPF.
- EPF II – you can withdraw for education, housing and medical purpose.
- The tax relief is RM6,000 and another RM1,000 for EPF annuity scheme.
- EPF gives annual dividend. For Historical returns please go to http://www.kwsp.gov.my/portal/about-epf/investment-highlights/dividend-rates/dividend-rates