Private Pension Administrator proposes reduced penalty for early PRS withdrawals

PETALING JAYA: The Private Pension Administrator Malaysia (PPA) has submitted a proposal to the Securities Commission (SC) to reduce the tax penalty for pre-retirement withdrawal of private retirement scheme (PRS) funds to 4% from 8% currently.
PPA CEO Husaini Hussin (pix) said years after the launch of PRS in 2012, it is timely to relook the tax penalty as it would like to see it being reduced to increase the take-up of PRS.
"In line with discouraging people from reaching into their cookie jars, there's a tax penalty on pre-retirement withdrawals. If you withdraw before age 55, there's an 8% tax penalty. Our aspiration is to reduce this to 4% to make this more attractive for Malaysians to invest in PRS," he told SunBiz in an interview recently.
The result of the proposal will be known during the Budget 2019 announcement.
For comparison, the Employees Provident Fund does not have a tax penalty for pre-retirement withdrawals but members need to qualify for withdrawals by furnishing supporting documents.
"We shared with the SC the industry's aspiration to reduce the tax penalty, and that would also reduce concerns by the young people that they can't withdraw. We leave it to the SC to work out the mechanism," Husaini said, adding that the tax penalty is meant to discourage members from withdrawing funds before their retirement.
In 2017, pre-retirement withdrawals made up 31% of withdrawals by members. Retirement accounted for 66%, while death and others make up the remaining 3% of withdrawals.
Since the PRS's inception in 2012 to May 31, pre-retirement withdrawals accounted for 5.78% (RM25.59 million) of totaled withdrawals (RM442.79 million). Retirement made up 92.25% (RM408.48 million) for the withdrawals, followed by death at 1.29% (RM5.7 million) and other reasons (0.68%) like permanent emigration, permanent total disability, serious disease, mental disability.
PPA, the central administrator for PRS, has also proposed that the Youth Incentive be extended as it has come to its final year.
The PRS Youth Incentive was initially launched under the Budget 2014 where youth aged between 20 and 30 years will be given a RM500 one-off incentive by the government with a minimum contribution of RM1,000 in the PRS. In Budget 2017, the incentive amount was enhanced to RM1,000.
"We're seeing that this helps to shape savings behaviour of youths as 28% of our members are youths," said Husaini.
About 48,167 youths qualified last year for the Youth Incentive but the final round of payment is in the process for last year's recipients.
He said it is also introducing more incentives in the digital space this year, which are direct debit and bulk enrolment (targeting corporate PRS).
"Our digital initiatives are not just to facilitate individuals to sign up, but we're also offering facilities to providers and distributors to sign up interested employees to PRS."
PPA had earlier this year launched the PRS Online Enrolment, with 1,000 Malaysians signing up for PRS online up until end of May. Two remaining PRS providers are in the process of being onboard the system.
As at May 3 there are 330,924 PRS members, of which almost 30,000 new PRS members were registered in the first five months of 2018. The first five months of 2018 saw a growth of 38.5% in members against the same period last year. PPA is targeting a 40% growth in members this year, as higher growth is normally seen in the last quarter of the year.
Total contributions in net asset value (NAV) stood at RM2.33 billion as at May 31, of which nearly RM200 million were recorded in the first five months of 2018. In the first five months of 2018, contributions in NAV rose 42.5% compared with the same period last year.
"More is being saved this year compared to last year despite challenging market conditions and the change of government. This shows that our members still have confidence in PRS and are still saving in PRS," said Husaini, adding that it tends to see more contributions in the third and fourth quarters.
He noted that PPA had a record year in 2017, where it posted a 47% jump in NAV, and is hard pressed to achieve the same target now because of the challenging market conditions, escalated by the tariff war between US and China, with negative sentiments affecting the capital market.
"Over the long term, typically capital market would perform better and savings in PRS, similar to EPF, is for the long term," explained Husaini.