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IF you can avoid it, do not reduce your monthly contribution to 9% in the Employees Provident Fund (EPF) for over the next six months.Retain it at 11% and let your money grow for your retirement fund.One may argue that the impact is too small and those in need should reduce it to 9% instead of 11%.However, take note of the compounding interest factor.Money is most needed when you retire as your monthly salary diminishes. EPF is seen as a good source of accumulating wealth for your retirement. Though, it is not the only source, given the current interest rate climate, it still offers decent dividends.“(The 2% reduction may be) nothing to shout about. The focus should be on employers increasing their contribution to at least 19% (from 12% as that will help employees have more funds at retirement),’’ said Taxvantage Management chartered financial consultant KP Bose Dasan.Based on his computation, if you are earning a monthly salary of RM5,000 and opt for a 9% reduction instead of 11%, the shortfall is RM698 on employee contribution.That is the future value over six months and includes the potential 6% dividend rate.However, the RM698 with 6% dividends and compounding effect rises to RM2,238 over a 20-year period.Dasan said survival is the key dynamic in life.When jobs were lost during the Covid-19 pandemic, and with reduced income, it became necessary for almost half the people to dip into their savings.Employees should go back to 11% as soonest possible. A valuable element would be to increase employer contribution to 19%, he adds.He said this deduction is allowable to employers under Section 34 (4) of the Income Tax Act 1967.“This increase is certainly more beneficial than a bonus of 7%. The bonus is taxable while the 7% additional contribution is not taxable as in current practice. However, it goes into EPF as savings and can only be withdrawn upon retirement,’’ Dasan added.If you save with the EPF, the additional benefit is the personal relief of RM4,000 a year.Dasan said, given a tax bracket of 21%, that is equivalent to a tax savings of RM840 (RM4,000 multiplied by 0.21).“We have a good EPF system. May it prosper without any scandal,” Dasan added.He added that if the employer’s portion is raised to 19% (RM155,685) from 12% (RM98,327) the difference is RM57,358. This is based on a monthly salary of RM5,000 and an EPF dividend rate of 6% over a 10-year period.“This is significant enough based on reports that almost 40% have less than RM10,000 right now in their EPF,’’ he adds.For Budget 2022, the government announced the minimum contribution rate for employees to the EPF, which was reduced to 9% since last year, to remain the same till June 2022.“The net effect (of the 2% point reduction) is to grant a false sense of cheer to those who understandably want to have extra money in their pockets right now.“But the high price of that ill-conceived feel-good move is to further erode the future value of Malaysians’ retirement funds,’’ said Rajen Devadason, a licensed financial planner with Manulife Investment Management (M) Bhd.“My advice to all my clients is to inform EPF or your human resource department to not put through or extend that reduction and to opt to contribute 11% of the employee’s base salary instead of just 9% to EPF,’’ said Devadason.Kimberly Law, a licensed financial planner with IPPFA Sdn Bhd adds that “you would have seen old people working. Ask yourself, did they choose to work or they did not have a choice?“If you want to have the choice to not work, then you need to make sure you have sufficient retirement funds that can sustain you after you stop working,’’ she said.Of course, there are some who prefer to work even after retirement for reasons best known to them.Law believes that if you do not want to contribute to EPF, you need to have a supplementary investment that is solid and secured. “It cannot be volatile and heavily affected by market movements. You wouldn’t want the market fluctuations to dictate your living expenses and you need to start it as early as possible. The earlier you start, the less you need to contribute later on (as the compounding factor helps),’’ Law said.She said if you are in a tight financial situation now then it is good to opt for a 9% EPF contribution.“However, please spend this 2% wisely. You need to replenish that 2% when you are out of a tight financial situation. If you do not choose to replenish, your future self will have less money to spend even on basic necessities.“Your future self will need to continue to work at an old age in order to have a roof over your head and food on the table.“Your actions now could determine the quality of lifestyle of your future self,’’ Law said.Law said if you have tight cash flow or have trouble saving or budgeting, avoid spending just to enjoy the tax reliefs.That could potentially damage your finances further.“Though it is a tempting thought, tax reliefs should not make you go out of your way to buy gadgets, cars or travel domestically.Be aware of the additional costs for fuel consumption, car servicing and maintenance besides the loan repayment.“You should only buy a car if you can afford the loan repayment and other expenses that come with it comfortably,’’ she added.


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