As an expat, there are numerous ways for you to build up your retirement savings, whether it is through diversifying investments or developing a comprehensive retirement roadmap with your financial advisor.
However, expats living and working in Malaysia also have access to EPF (Employees Provident Fund), a state pension scheme similar to an IRA/401K or a U.K. state pension. If used as a part of a sound financial or investment plan, EPF can enhance retirement savings.
There are some key benefits to EPF but there are also challenges which, with a little planning, you may mitigate.
Understanding EPF for expats
The Employees’ Provident Fund (EPF) is a compulsory pension scheme for all Malaysians. For expats or foreign employees in Malaysia, EPF contributions are not mandatory unless you hold a Permanent Resident status.
Expats working in Malaysia can opt-in to contribute towards EPF, as long as the employer agrees to contribute. However, the contribution requirements will differ depending on the employee’s status.
If you hold a Permanent Resident status or have registered as a member before August 1st, 1998, then you would need to have a minimum monthly salary of RM5,000 and above and contribute a percentage of your salary based on the following:
- Stage 1 (Below 60 Years)
- Employee contribution: 11%
- Employer contribution: 12%
- Stage 2 (Aged 60 and above)
- Employee contribution: 5.5%
- Employer contribution: 6%
Suppose you registered as a non-Malaysian member after August 1st, 1998, in that case, there will be no minimum requirement for your monthly salary. Your contributions will be as follows:
- Stage 1 (Below 60 Years)
- Employee contribution: 11%
- Employer contribution: MYR 5.00
- Stage 2 (Aged 60 and above)
- Employee contribution: 5.5%
- Employer contribution: MYR 5.00
It is important to note that both employers and employees have the option to contribute more than the minimum amount, which some employers do offer as a benefit for the employee’s pension.
As to how your funds are allocated in EPF, in May 2024, EPF officially restructured the way it allocates its contributions. Previously, members would have two accounts, Account 1 and Account 2, whereby the first account would hold 70% of the contributions and Account 2 would hold 30%.
Now the accounts are split into three:
- Account 1 (Akaun Persaraan): Accessible only at age 55 and holds 75% of contributions.
- Account 2 (Akaun Sejahtera): Able to withdraw for specific usages such as housing or education and holds 15% of contributions.
- Account 3 (Akaun Fleksibel): A new flexible account that can be withdrawn at any time and holds 10% of contributions.
The withdrawal eligibility for expats with EPF
In terms of whether you can withdraw your funds from EPF, the eligibility will differ depending on your status as a member.
Non-Malaysians who hold Permanent Residents and are members registered before August 1998 will have access to all of the withdrawal options available, such as being able to do a partial withdrawal or a monthly payment withdrawal.
For expats who became members after August 1998, you are only able to do full withdrawal from the entire account once you have reached the age of 55. There are, unfortunately, no other withdrawal options available for expats, such as the ability to schedule a monthly withdrawal on EPF’s dividends.
The benefits of EPF for expats
Since EPF contributions are not mandatory and the withdrawal options are very limited for expats, you might wonder why you should even bother contributing to the EPF.
There are certain unique benefits that EPF offers as a pension fund that can be quite beneficial for expats who intend to retire in Malaysia or stay long enough to reap its rewards.
“Guaranteed” returns
One of the biggest benefits is that EPF offers a government-guaranteed minimum dividend rate of 2.5% p.a., which can be a significantly higher rate than most savings accounts or fixed deposits in Malaysia. This also makes EPF a more secure investment option compared to other volatile markets.
Tax savings on contributions
Contributions to EPF are tax-deductible to a certain limit, which can help reduce your taxable income, especially if you are still working in Malaysia. The amount of tax relief you can get for EPF contributions specifically is capped at RM4,000 per year, but if you were to combine it with life insurance, it can be as high as RM7,000.
Tax-free withdrawal
EPF withdrawals after the age of 55 are considered tax-free withdrawals, ensuring you get the most out of your retirement savings. Any withdrawals before the age of 55 from Account 2 for purposes such as medical expenses or purchasing a house are also considered tax-free withdrawals.
If you decide to leave the country permanently, EPF allows you to fully withdraw all of your funds in one lump sum. However, it is important to plan your withdrawals as you could still face income tax if you were to bring it back to your home country.
This is where it becomes important to consult with a Private Wealth Manager. Our team is equipped to help you restructure your wealth to mitigate taxes.
Employer contribution
While EPF contributions are compulsory for employers based on a fixed percentage of salaries paid to employees who are Malaysians and Permanent Residents, it is not compulsory for expats.
The minimum amount that employers can contribute is only MYR 5.00. However, some employers do offer to contribute 12% of your salary which helps to build up your retirement savings even more.
Challenges of contributing to EPF
Despite the benefits EPF provides, there are still key challenges and drawbacks.
Currency risk is a major challenge as the EPF fund returns are calculated in Malaysian ringgit, instead of the U.S. dollar or U.K. pound. As such, any currency shifts that the ringgit suffers can affect your funds and your overall purchasing power.
Another major challenge is the lack of control over the investment strategy as EPF does not share or offer a clear view of the types of investments being made using your funds. This can severely restrict your ability to take on more risky investments as you are locked into what EPF invests.
How Melbourne Capital Group can help you maximise your EPF funds
Our Private Wealth Managers can develop bespoke strategies to help you maximise your EPF funds. One such example is to take any excess funds from your EPF account, for some that could look like over RM1 million, and reinvest those funds into flexible investments.
We explore these strategies and more in our webinar, which dives deeper into how EPF can be utilised to further maximise your retirement savings, and maintain financial flexibility while living in Malaysia.
That’s why we’re offering FREE access to our webinar recording on the Employees Provident Fund (EPF) framework.
Request now via this link.
Ultimately, EPF is another financial tool that you can use as an expat to further strengthen your retirement planning in Malaysia when used wisely.
Learn more about EPF for expats by watching our webinar here. Or, if you are ready to maximise your retirement savings using EPF, schedule a one-on-one complimentary discussion with our Private Wealth Managers by contacting us.
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