EPF Contribution Rate 2016: 8% or 11%?

EPF Contribution Rate 2016: 8% or 11%?

One of the key highlights in the recent Budget 2016 recalibration announced by the Prime Minister Datuk Seri Najib Tun Razak was the reduction of the employees’ contribution rate for the Employee’s Provident Fund (EPF) by 3%.

So, now EPF members have the options of choosing between 8% or 11% of their salary to be contributed to EPF savings every month.

Will this move put our retirement nest in jeopardy? Due to the global economic slowdown, it is important for the Government to ensure domestic growth to avoid recession within the country.

One of the main objectives of Malaysia Budget 2016 revision is to spur growth, and increasing the people’s disposable income will in turn increase consumer spending.

“Consumer consumption represents 53% of gross domestic product, so consumer spending is a big generator for GDP growth,” said Manokaran Mottain, chief economist at Alliance Bank to The Star Online.

According to the Prime Minister, the reduction rate would translate into RM8 billion in consumer spending.

But the question is, will the additional money you get every month make a difference to your monthly expenses?

Read on to find out how the 3% reduction can impact your finances as a non-taxpayer and a taxpayer:

What the 3% EPF reduction mean to non-tax payers?

According to Budget 2015, tax payers with family and income of RM4,000 per month will not have tax liability. These households will not have to pay income tax.

Here’s how much 3% reduction in EPF contribution from March 2016 to December 31, 2017 will mean to these families:

New EPF Contribution at 8%
Monthly Gross Income
RM4,000
Old EPF Deduction (11%)
RM440
New EPF Deduction (8%)
RM320
Extra Take-home Salary a Month
RM120

If you opt for the 8% EPF contribution rate, you will get an additional RM120 every month, and that will come up to RM2,640 for 22 months (March 2016 to December 2017).

Calculate your additional take home pay using our calculator below:

But what would that mean for your retirement fund? Using 2014’s dividend rates, which is the highest rate since 1999 at 6.75%, the additional RM120 every month for 22 months could potentially accumulate this much returns in retirement fund:

Compounding effect on the additional savings in EPF
Monthly deposits
RM120
Duration
22 months
Annual dividend rate
6.75%
Total interest earned
RM187.48
Compound over 30 years, assuming at the same annual rate of return
Total interest earned
RM17,968.94

Instant gratification often comes with repercussions. An additional RM120 may mean a lot for you and your family at the moment, perhaps it will make a difference between keeping your house and foreclosure, or keeping your car and repossession. However, if the additional cash is just to fund new toys for your children, or getting new rims for your ride, the extra cash would definitely work harder contributed to EPF.

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What the 3% EPF reduction mean to tax payers?

For tax payers, there are a lot more aspects to look into to see whether the 3% reduction is worth taking. First there is the EPF contribution tax relief of up to RM6,000, then there is the higher chargeable income to be taxed.

Would the 3% still make sense at the end of the day? Let’s take a look.

New EPF Contribution at 8%
Monthly Gross Income
RM5,000
Old EPF Deduction (11%)
RM550
New EPF Deduction (8%)
RM400
Extra Take-home Salary a Month
RM150

That’s an additional RM150 every month, coming up to RM3,300 over 22 months. However, that would also mean a lower EPF tax relief of RM5,100 for Year of Assessment 2016 (tax filed in 2017), and RM4,800 for Year of Assessment 2017 (tax filed in 2018) while the previous 11% deduction would have maxed out your tax relief to RM6,000.

When the time comes to file for your income tax in 2017, here is the difference you will see:

Old EPF Contribution (11%)
New EPF Contribution (8%) YA 2016
New EPF Contribution (8%) YA 2017
Chargeable Income
RM45,000
RM45,900
RM46,200
Total tax you should pay
RM1,900
RM1,990
RM2,020
The difference
An additional RM210 in tax
* Assuming only Self and Dependent relief (RM9,000) and EPF & Life Insurance relief (RM6,000) are applicable, with the same tax rates for both years.

 

Want to know how much you would be paying for your tax this year (YA2015)? Check out the Malaysia income tax calculator 2015.

An additional RM210 a year is not a lot, but if you add up the opportunity cost you lose when you opt out of saving the additional 3% in your EPF, here’s exactly how much you stand to lose:

Compounding effect on the additional savings in EPF
Monthly deposits
RM150
Duration
22 months
Total interest earned
6.75%
Annual dividend rate
RM234.35
Compound over 30 years, assuming at the same annual rate of return
Total interest earned
RM22,461.18

Based on the calculation above, you would have missed out on an additional RM22,461.18 by the time you retire if you decided to choose the new 8% EPF contribution rate. Adding this amount with the additional tax amount of RM210, that will come up to a whopping RM22,671.18!

Should you opt in or out?

Is this is the right move by the Government? Gross domestic product (GDP) growth for this year has been revised to between 4% and 4.5%, from the earlier forecast of between 4% and 5%.

In the name of spurring domestic economic growth, this is certainly a good move, as it will likely increase consumer spending, especially among the low and middle-income groups.

Nor Zahidi Alias, the chief economist of Malaysian Rating Corporation lauded the move as consumer sentiment has been declining over the last few quarters.

“Actual growth in consumer spending also dropped below 5% in the third quarter of 2015, something that has not happened for quite some time. This calls for greater efforts to shore up consumers’ appetite for spending to support the economy,” Nor Zahidi was quoted in an article published by The Star Online.

The low and middle-income groups represent 60% of the working population, said Manokaran, and they would most likely spend the additional cash every month. If you decide to opt for 8%, ensure the additional cash is put into good use such as lowering your high interest debt, paying for your child’s education or even building up a solid contingency fund.

However, for the remaining 40% of the working population, it would be prudent to either maintain their EPF contribution at 11%, or save and invest the additional cash elsewhere.

With the economic slowdown, every Ringgit makes a huge difference and should work hard in giving you adequate returns.

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