ARTICLES

A Retirement Plan for the Self-Employed

Take advantage of the flexibility to choose how often and how much to save with the Private Retirement Schemes (PRS)

A large segment of the working population in Malaysia is self-employed or work in the gig economy. Drawn by the flexibility to choose which projects to take on, the opportunity to accumulate diverse work experience and the autonomy to set their own working hours, many gravitate towards the entrepreneurial route to pursue their dreams and chart their own paths.

Indeed, out of a total workforce of 15.54 million, according to the latest figures published by the Department of Statistics Malaysia, the World Bank estimates that more than 1 in 4 – about four million – are self-employed. From financial planners and small business owners to online merchants and e-hailing drivers, the nature of work among the self-employed is numerous, varied and multifaceted.

In line with global trends, reports indicate that this is increasingly also the preferred choice of employment among Malaysian millennials and Gen Z – those born in the mid-1990s onwards. As exciting as this development is, Malaysians who are self-employed often neglect something everyone should do the moment they start working: saving for retirement.

Retirement Savings for the Self-Employed

Being a freelancer, independent contractor or technopreneur means you do not get to enjoy the usual perks of salaried employment. Income typically fluctuates from month to month, and there are no pension or mandatory scheme to provide a financial safety net. It might be tempting, or even necessary, to channel any excess money towards expanding or covering the cost of business. The risk of saving too little for retirement is high.

This worry is supported by a survey conducted by Private Pension Administrator Malaysia (PPA), the central administrator for Private Retirement Schemes (PRS), where 62.8% of those who are self-employed said they wish they are saving more for retirement. Thus, unless you are expecting to receive a substantial windfall or a generous inheritance, it is important that you start taking proactive measures to save for your retirement.

“While you are busy growing your business or juggling several projects simultaneously, don’t make the mistake of not saving for retirement at all,” said Husaini Hussin, Chief Executive Officer of PPA. “Create a retirement plan based on your needs, goals and risk appetite and then stick to it by automating your savings.”

Why the Self-Employed Should Consider PRS

Having a retirement plan is vital for the successful self-employed person. It can mean the difference between toiling into your old age and taking leisurely strolls on the beach. With PRS, a voluntary long-term savings and investment scheme designed to help you save more for your retirement, you can contribute at your own pace and within your own financial ability.

“Think of retirement savings in terms of percentages instead of a fixed amount or putting aside only what is leftover at the end of the month,” Husaini said. “This ensures you don’t overstretch yourself in a lean month and you save a little bit more when business is good.”

To have adequate replacement income to sufficiently sustain your standard of living throughout retirement, PPA’s research suggests setting aside one-third of your income every month. When you save a percentage of your income each month this way, market volatility works in your favour as you gain more units when prices are low.

“It is a great way to save for your retirement over the long term,” Husaini said. “The top performing PRS funds have given PRS Members good returns since inception up to 31 October 2019.”

Another aspect of PRS is the Nomination feature, which supersedes all wills. Other than the mandatory scheme, PRS is the only savings scheme in Malaysia with a feature to ensure your loved ones or nominees receive your gift hassle-free in the event of your untimely demise.

Recently, Budget 2020 proposed that PRS Members be allowed to make pre-retirement withdrawals for the purposes of healthcare and housing without any tax penalty. Additionally, zero tax penalty withdrawals for medical expenses incurred by immediate family members are also allowed, in recognition of rising healthcare cost.

“The introduction of 0% tax penalty for pre-retirement withdrawals of PRS from sub-account B, which holds 30% of the savings for purposes of healthcare and housing, reflects the government’s understanding and commitment to help all Malaysians use a portion of their retirement savings for their needs,” Husaini said. “This proposal shall take effect from next year.”

Beyond that, PRS Members who reached the retirement age of 55 or suffer from permanent total disablement, serious disease or mental disability can withdraw the full sum of their PRS savings without any tax penalty.

Top Performing PRS Funds in the Following Categories Annualised Return* (%)
Conservative 4.28
Moderate 5.78
Growth 5.91
Non-Core 11.30
Non-Core Islamic 6.17

 

Source: Morningstar (5 Nov 2019)

*Annualized returns indicate the average growth for each year over a given time period, which in this instance, is from the date of funds’ inception up to 31 Dec 2019

PRS Online

Start saving with just a few simple steps by using PRS Online Enrolment, a service developed by PPA to help you save for your retirement in an easy, convenient and secure way. All you need is RM100 for the initial contribution and the minimum amount for subsequent top-ups is as low as RM50.

There are 55 conventional and Shariah PRS funds offered by eight PRS Providers to select from, but if you can’t decide, opt for the age-based default option. It is a unique feature of PRS which will automatically align the suitable asset allocation to your age group.

“The beauty of PRS is the choice and flexibility that PRS Members have to enrol or top up into multiple PRS funds anytime and anywhere with just one PRS account,” Husaini said. “Track your savings and monitor your investments with PRS Online or the myPPA mobile app. You always have the option of optimising your returns by switching PRS funds within the same PRS Provider or transferring your savings to another PRS Provider.”

Furthermore, PRS contributions you make are also eligible for a personal tax relief of up to RM3,000 per year, giving you tax savings which can further boost your retirement savings. You could enjoy zero sales charge or free insurance or takaful with coverage of up to RM100,000 with certain PRS Providers.

Do It Your Own

Being self-employed can be exciting, scary, and rewarding all at once, but without a mandatory scheme that makes savings and employer contributions compulsory, the onus of building a retirement nest falls squarely on you.

Money starts working for you the moment you set them aside for retirement. Whether you’re an entrepreneur, a photographer or e-hailing driver, take advantage of the flexibility to choose how often and how much to save with PRS.

Do it your own. Senang jer. Save in PRS.

Source: Private Pension Administrator Malaysia (PPA). PPA is the Central Administrator for the Private Retirement Schemes (PRS). This article first appeared in the December 2019 issue of Smart Investor.

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