EPF, ADVANTAGES & DISADVANTAGES

POSTED BY ANAS FATHUL ARIFFIN

Employees Provident Fund (EPF) is the only provident fund in Malaysia that is provided mainly by a contributory scheme catering for private sector employees as well as civil servants. This scheme is compulsory for all private sector employees above the age of 16 including foreign worker. At the beginning, the objective of EPF is to provide financial security for workers in their old age. Later, it provides additional coverage likes withdrawal for education, medical and down payment for the first house. Basically, EPF has two accounts which is Account 1 and Account 2. 70% of their contribution will keep in Account 1 while the rest are placed in another account. The retirement age for private sector in Malaysia is 55. So, when the contributors reach this age, they are allowed to withdraw all their money in that account. In order to provide flexibility service, retires have three option to withdraw their money. First is lump sum. Second is periodic payment and the last one is withdraw one portion as lump sum and the rest as monthly instalments.
There are several advantages of EPF. First, EPF is requires to pay a minimum dividend rate of 2.5% per annum to contributor. Therefore, contributors are confirmed will get the minimum return of 2.5% annually. Besides that, it gives tax benefit. Two tax benefits are available to the contributor. First, a tax deduction is allowed for EPF contributions. Second, since income earned by the EPF is exempted from tax, dividends paid out to contributors are also tax- free. Therefore, no wonder that our ‘king of gamble’, Tan Sri Lim Goh Tong is keeping his money about RM76 million in EPF.
Everything in the world has pro and contra. So the advantage is EPF unable to provide adequate old age protection on account. This is because of its contributors are low-income earners. Whatever earnings they set aside with the Fund will be inadequate, given increasing life expectancy, rising costs of living and erosion of family support. Besides that, the return or dividend given by EPF is low compare to other financial institution. This problem is aggravated by erosion of inflation rate. For example in 2007, the dividend announce by EPF was 5% while the inflation rate was 3%. Therefore, the real dividend rate was only 2%. This amount is low compared to other government controlled fund such as Tabung Haji and Permodalan Nasional Berhad (PNB). Besides that, the pre-retirement eroded the old age protectation.