Retirement Plans For The Self-Employed

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Being your own boss can be a great advantage in many ways. You need not ask for permission to skip office to catch your favourite football match. The only upper management breathing down your neck is your own conscience and of course, the bottom line. Above all, you are completely independent and fully responsible of your own financial well-being.

However, being self-employed is not a bed of roses. One of the biggest disadvantage is the need to plan for retirement entirely on your own. You are solely responsible of achieving the quality of life you desire post employment. The sooner you start saving for it, the better it is.

One of the biggest mistakes self-employed individuals make is not planning adequately for their retirement. When you are self-employed, it can be difficult to set money aside. You often use those funds to keep the business going if it does not turn out as you expected or when clients lag on payments. If you are a novice businessman, you could be focusing on start-up costs and put retirement last on the list. You may even rationalise not saving for retirement with the dream that ultimately you will sell your business and live off that proceeds in your old age.

Nevertheless, it is best to be safe than sorry. One rule of thumb is that you will need at least 67% of your last drawn salary monthly to live comfortably. In order to achieve that, you will need to save at least 33% of your income every month, as soon as possible. To get started, you will need to identify the various retirement plans best suited for the self-employed.

1. Private Retirement Scheme (PRS)

The PRS is a voluntary long-term contribution scheme designed to help self-employed individuals accumulate savings for retirement. Through PRS, you are provided a fixed range of funds or schemes that you may choose to contribute based on your time horizon and risk appetite or by default based on your age.

By default, you will be categorised to invest in growth funds if you are less than 40, moderate funds if you are between 40 and 50 years old or conservative funds if you are above 50. There are currently eight PRS Providers that you can choose from. The minimum initial contribution and additional contribution for each fund differs according to the providers.

Unlike Employee Provident Fund (EPF), PRS funds are not capital guaranteed and dividends are not fixed. Both solely depends on the performance of the fund. You are only allowed to withdraw from PRS’s sub-account B (this account consist of only 30% of total fund value) pre-retirement (before 55) but with an 8% tax penalty charged to it.

By saving for retirement through PRS, you can achieve diversification as your contributions will be pooled for the purchase of a diversified portfolio of stocks, fixed income securities and other assets which yields returns at lower risks compared with investing directly in any individual investment. The funds are also managed by professional fund managers with the relevant expertise and resources to manage the funds. Like any other investments, PRS funds are subject to various cost and charges that you must account for when saving under this scheme.

Besides saving for your retirement, there are other perks you can enjoy by making PRS contributions:

  • You are allowed to claim for a tax relief of up to RM3,000 per annum
  • Income distributed will be exempted from income tax
  • Employers who made contribution to the PRS on behalf of their employees are allowed to claim tax deduction against their business income on the contribution made up to 19% of the employee’s remuneration
  • Free Personal Accident Insurance or Takaful with coverage of Accidental Death and Permanent Disability is provided – minimum net asset value (NAV) of RM5,000 and coverage up to RM100,000 per person
  • If you are between the age of 20 to 30, you will be given a RM500 one-off contribution when you make a contribution of RM1,000 in a single PRS fund

2. 1Malaysia Retirement Savings Scheme

1Malaysia Retirement Savings Scheme is another voluntary long-term contribution scheme designed to help individuals who are self-employed or without fixed income to accumulate savings for their retirement under EPF. Since the scheme is initiated by the Government, the system is similar to EPF.

You can contribute from a minimum of RM50 and up to RM5,000 per month. You will receive yearly dividend according to the rate declared by EPF for the year until you are 75. Similar to EPF, your capital is protected under this scheme. Rules and procedures for withdrawal of EPF savings applies to this scheme too.

As an added benefit, the Government will contribute 10% from your contribution amount subject to a maximum of RM120 per year if you are below 55 – applicable from 2014 to 2017.

3. Retirement plans

Being self-employed, you can also choose from a wide range of endowment plans that coincide with your retirement, offered by banks and insurance companies.

Under such retirement plans, you can contribute a lump sum amount or make regular contributions or premiums and let it accumulate over a pre-agreed number of years. When the plan matures at 55, it will provide you with a stream of regular income until you are 75, such as the HSBC Takaful Retirement Plan. There are also plans that mature in a lump sum at the age 75, such as AIA Retirement Plan. However, for some you can still continue to contribute and accumulate during the post maturity period to generate more income in the future.

When you invest in this, you may also receive tax relief privileges for contributions, self-insurance protection throughout the tenure of the plan and income received is free from tax.

While running your own business provides many benefits, but you are also exposed to a lot more risks than employed individuals. You are on your own when it comes to saving for retirement. Though many self-employed individuals were reported to save little to no money for retirement, you can avoid this costly financial mistake. If you start saving as early as possible, you will be able to achieve that dream post-retirement life. Understand the common retirement plans for the self-employed that are available and choose the one best suited to your needs – and you will be on your way to a well-funded retirement.

Don’t leave your retirement to luck. Address these retirement income issues today.

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