Savings For Retirement - Malaysia

One does not need to earn very much to have his or her retirement savings taxed in Malaysia. If you earn above RM4,525 a month, chances are you will have some of your retirement savings taxed. That threshold falls to about RM3,896 a month if one assumes two months’ bonus.

If you are also paying life insurance premiums, that maximum RM6,000 annual income tax relief shared with the 11% statutory contributions to the Employees Provident Fund (EPF) would be hit earlier — leaving more of the money locked away for retirement in the taxable income pool.

A relief capped at RM6,000 means RM7,200 of the income kept with the EPF for someone who earns RM10,000 a month (zero bonus) is subject to taxation. If the entire RM13,200 deducted as retirement savings in the EPF is tax-exempted, taxable income would fall to RM97,800, which incurs payable taxes of RM10,438 instead of RM12,100 (with the RM6,000 cap).

In other words, lifting the cap could give RM1,662 extra a year or RM138.50 a month for spending.

Similarly, someone earning RM5,000 a month (zero bonus) contributes RM6,600 a year (employee’s portion) to the EPF. If the RM600 above the RM6,000 EPF relief cap is also exempted, the person’s taxes that year would fall from RM1,600 to RM1,352 — a savings of RM248 a year or RM20.70 a month.

Rather than direct salary increments, some people savvy with taxes might have asked their employers to increase the employers’ contribution to EPF from the mandatory 12% or 13% (income below RM5,000 a month) to the maximum of 19%. That’s because employers’ contribution to the EPF of up to 19% of salary does not incur personal income taxes as it is not counted as part of employment income.

Why is it then that employees’ contribution of 11% is only tax-exempt up to RM6,000 a year? Why not increase the threshold or remove the cap to encourage more people to save more money with the EPF to boost the retirement savings pool?

After all, money saved with the EPF cannot be taken out before one reaches the statutory retirement age, unless there is approval for big-ticket items such as property purchases or education that presumably would help increase one’s future income or net worth.

“EPF savings and dividends should not be taxed as they are for retirement. Already, many contributors do not have enough retirement savings. More than two-thirds (68%) of EPF members aged 54 had less than RM50,000 in EPF savings,” says Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC).

As it is, wage earners can voluntarily save up to RM60,000 a year with the EPF, but withdrawals will be subject to the same conditions as statutory contributions.

“A bigger relief for EPF contribution will be welcomed by middle-income households to encourage savings above the mandatory contribution. However, relief in other forms, including widening the tax band, may need to be looked into, especially since the middle-income taxpayers are now paying income tax as well as contributing to GST revenue. Individuals with big families are bearing a higher tax burden as household spending increases exponentially with family size and dependants such as aged parents,” says Dr Yeah Kim Leng, economics professor at Sunway University’s Business School.

If the concern is that the lifting of the RM6,000 cap would benefit the rich more than the middle- income taxpayers, then policymakers can still consider raising the cap to a higher level to put more money into the pockets of the middle-income professionals and wage earners.