Question

Topic: Retirement Planning and Employees Provident Fund(EPF)QUESTION 4 (25 MARKS)    

(a) Read the following information and answer the question. 

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Challenges with retirement savings in a pandemic 

Theedgemarkets.com 

November 02, 2020 06:00 am +08 

 

A recent landmark global retirement study shows mixed results for Malaysia's retirement and pension prospects. This is a problem because the country is just a decade away from ageing nation status. Simply put, as the population grows older, the need for sustainable, long-term retirement funds is going to become that much more important. 

This concern has been exacerbated by the Covid-19 pandemic and the damage it has done to individuals and businesses. 

According to the Mercer CFA Institute Global Pension Index 2020, Malaysia has a C+ rating, putting it alongside the UK, Belgium, Hong Kong, the US and France. 

The C+ grade denotes a system that has some good features but also comes with major risks and/or shortcomings that should be addressed. If these improvements are not made, the efficacy and long-term sustainability of the retirement infrastructure would be called into question. 

But really, this is just the latest in a series of worrisome indicators about retirement security in Malaysia. In July last year, Department of Statistics Malaysia (DoSM) chief statistician Datuk Seri Dr Mohd Uzir Mahidin warned that Malaysia is expected to become an ageing nation by 2030.       

                         

A country is regarded as "ageing" once the percentage of people aged 60 and above hits 15.3%. The latest available data suggests that the elderly presently make up a little over 10% of the population. 

While the country has undoubtedly made great strides in reducing overall poverty, data indicates that a large chunk of the population is still vulnerable to unexpected financial hardships. 

Indeed, the Khazanah Research Institute's (KRI) The State of Households report for October found that while the nation's absolute poverty rate declined sharply between 1989 and 2019, many household incomes were only slightly above absolute poverty. This means that they were at risk of falling into severe deprivation. 

Perhaps unsurprisingly, this vulnerability is reflected in retirement savings and contributors have been severely tested in what has been an all-round traumatic 2020 so far. 

According to the latest data in September, active Employees Provident Fund (EPF) contributors make up just over half of all registered members. This comes up to 7.54 million, out of a total membership of 14.8 million. Of this number, as many as 54% of contributors aged 54 have less than RM50,000 set aside for retirement. 

In a May interview with The Edge, KRI senior research associate Hawati Abdul Hamid noted some worrying findings. "More than 80% of EPF contributors do not meet the minimum savings target of around RM240,000 by retirement age, and the bottom 20% of contributors average less than RM7,000 in savings." 

Even though the government has allowed EPF members to withdraw RM500 monthly from Account 2 as a means to stave off hardship due to the Covid-19-enforced shutdowns, this is unlikely to be a long-term solution. In any event, Hawati said the bottom 20% of contributors simply do not have enough money in their Account 2 to last them 12 months, even at a withdrawal rate of just RM500 a month. 

Hawati was referring to the EPF's i-Lestari scheme launched in April as part of the government's Prihatin stimulus package. This scheme, which allows members to withdraw between RM50 and RM500 monthly from Account 2 until March next year, is meant to help members bridge any income shortfalls during the pandemic. 

In addition, the EPF early this year reduced the minimum statutory contribution rate for employees from 11% to 7%. The new rate became effective in April and runs through to the end of the year. Employees do have the option of maintaining the 11% contribution rate, by completing Notis Pilihan Mencarum Melebihi Kadar Berkanun KWSP 17A (Khas), which is available on www.kwsp.gov.my. 

                              

An additional Covid-19 assistive measure saw EPF offering financial advisory services to all members and employers, in the form of Retirement Advisory Services (RAS) and Employer Advisory Services (EAS) respectively. Members or employers can make an appointment with the EPF to obtain advice on all matters pertaining to managing their finances, from budgeting, saving and retirement planning to company cash flow. 

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(Source: The Edgemarkets.com) 

 

Retirement income is important for a retired individual to maintain the same standard of living during retirement. Malaysia is moving toward aging country and the Employee Provident Fund (EPF) data shows that most of its members do not have sufficient funds to retire. Given the worrying situation, discuss the alternative voluntary retirement scheme that one can opt for. Explain how it operates and its available types. Discuss the factors you consider in choosing the right one.        

(17 marks) 

 

(b) Explain the meaning of estate and estate planning. Explain what happen if a person dies without a will (intestate) in Malaysia compared to the one who has a will (testate). 

(8 marks)

Answer & Explanation
Verified Solved by verified expert

The alternative retirement scheme that one can opt for in Malaysia is the Private Retirement Scheme. 

Private Retirement Schemes (PRS) is long-term savings and investment plan that allows you to put more money down for your retirement. PRS aims to broaden the range of options available to all Malaysians, whether employed or self-employed, to augment their retirement savings in a well-structured and controlled environment. Individuals can choose from various retirement funds offered by each PRS based on their retirement objectives, aspirations, and risk appetite. PRS fund alternatives are designed to improve long-term returns for members while remaining within a regulated framework.

 

How Private Retirement Scheme works

You can choose to make contributions directly to the PRS Provider or through their registered distributors to begin your PRS savings. You will be automatically provided a PRS account once you have successfully started your PRS savings.

PPA will administer your PRS account as the central administrator for PRS and give you an annual consolidated statement of your PRS account with the PRS Provider (s).

 

Types of Private Retirement Scheme in Malaysia.

Growth fund- the age group for this plan, is individuals below the age of 40 years. Its parameters are a maximum of 70% equities. This plan does not allow any investment to be made outside Malaysia.

Moderate fund- The age group for this plan is individuals between the age of 40 to 50 years. Its parameters are a maximum of 60% equities. This plan allows individuals to make investments outside Malaysia. 

Conservative fund- the age bracket of this plan is 50 years and above. Its parameters are a maximum of 80% in fixed income securities, with a minimum of 20% in money market securities and a maximum of 20% in equity products. in this plan, investment outside Malaysia is not allowed. 

 

Factors to consider when selecting the best retirement scheme.

Look for a retirement pension that is enough.

While choosing a retirement pension plan, you must bear in mind that you will receive adequate pension income after you retire, which will be sufficient for you and your family. You should also select a plan that would provide financial security to your loved ones even after your death. The other thing to consider is that the amount must be sufficient to cover your expenses after various tax deductions.

Period of vesting

Always choose a retirement savings plan with a vesting duration that corresponds to your requirements and needs. People can elect for a variety of pension saving schemes once they reach 40, which can streamline their income and secure them from an early age, while other plans can even be opted for at the age of 60 if you want to retire late.

A suitable annuity alternative

You must select a pension plan that includes the annuity option that is best for you. For example, specific lifetime retirement savings plan options guarantee annuity payments for a predetermined number of years regardless of whether the insured individual lives or dies. On the other hand, certain savings plans provide annuities to the assured person's nominees after their death.

Expenses

People must always seek out options with the lowest possible expenditures or prices. You must recognize that the more money you spend on expenses than saving, the less money you will keep for retirement. This is why you should always compare all of the accessible savings plans before making a decision.

The inflation rate should be lower than the return on investment.

Retirement planning can be viewed as a long-term financial objective. Many consumers have a significant issue when investing for the long term: safeguarding their money from capital erosion due to shifting inflation rates. Inflation can harm the value of your savings and long-term investments. As a result, it's critical to remember that your return on investment (ROI) should always exceed the inflation rate.

Step-by-step explanation

b) Meaning of estate. 

Everything that makes up an individual's net worth, including all land and real estate, financial securities, possessions, cash, and other assets that the individual owns or has a controlling interest in, is referred to as an estate.

It means any valuable thing that an individual has in the financial and legal senses—real estate, art collections, antique objects, investments, insurance, and any other assets and entitlements—and is also used to refer to a person's net worth. A person's estate is defined as their total assets minus any obligations in legal terms.

meaning of estate planning

Estate planning is the process of preparing duties to handle a person's assets in the case of incapacity or death. The gift of assets to heirs and the settlement of estate taxes are all part of the preparation. The majority of estate plans are created with the assistance of an estate law practitioner. Estate planning entails deciding how a person's possessions will be kept, managed, and dispersed after passing away. It also considers how an individual's property and financial obligations will be handled if they become disabled.

If a person dies without a will in Malaysia, the following is likely to happen.

Family disputes are a possibility.

Because your wishes were unclear at the time of death, your surviving spouse, family, and relatives (heirs) may face increased pressure to spend more time, money, and emotional energy settling your affairs.

You will not have the authority to appoint an executor.

Suppose you don't have a will or leave one without naming an executor. In that case, the court will have the authority to give Letters of Administration to whoever the High Court Judge deems appropriate to handle your inheritance. However, this may lead to disagreements among family members or beneficiaries about who should fill this position.

The process of distribution takes a prolonged period.

The process of filling in and acquiring a Grant of Letters of Administration will be more expensive and time-consuming. This is because it will typically require an administration bond and the appointment of two sureties to ensure proper estate administration and additional court orders to effect the transfer of real property.

You forfeit your right to delegate a guardian of your own.

If you and your spouse die simultaneously without a will, additional issues may occur, especially if your children are minors. In this situation, the court will appoint an administrator who can act as a guardian according to Section 30 of the Probate and Administration Act 1959. Alternatively, the court may appoint a guardian to care for your children's interests under Section 8 of the Guardianship of Infants Act 1961. However, the individual chosen may not be your first choice. Similarly, family disagreements about who is the best guardian may occur.

 

References

Foziah, N. H. M., Ghazali, P. L., Mamat, M., & Salleh, F. (2017). Alternative Retirement Schemes in Malaysia: Way Forward for a Sustainable and Comprehensive Coverage for all Community Level. World Applied Sciences Journal35(8), 1620-1625.

Khan, S., Tan, O., Khan, N., & Vergara, R. G. (2017). Strengthening Social Safety Net for Older People in Malaysia. Journal of Southeast Asian Research2017, 1-10.

Salleh, M. C. M., Chowdhury, M. A. M., Razali, S. S., & Laksana, N. N. M. (2020). Retirement Schemes, its Challenges and Ways of Reformation: A Cross-Border Study. International Journal of Asian Social Science10(9), 507-520.