238) Should You Lower Your 3PF Contribution Rate?

238) Should You Lower Your 3PF Contribution Rate?

The Government had decided to lower 3PF Employee Contribution rate from 11% to 7%. That is a 4% reduction. The reduction will start from April to December 2020. That is only 9 months.

What is the amount difference?

The 4% reduction will obviously increase your take home pay. Basically, it means you contribute less to 3PF and you get a higher amount in your take home salary. It does not affect your Total (Gross) Salary. It is still the same.

If your gross salary is RM5,000, you currently contribute 11% to your 3PF.
That means you contribute RM550 (RM5000 x 11%) of your Gross Salary and save for your retirement.

After the reduction to 7%, you contribute 7% to your 3PF.
That means you contribute RM350 (RM5000 x 7%) of your Gross Salary and save for your retirement.

The difference of RM200 (RM550 - RM350) is the extra amount you can use monthly.
From April to December 2020, you have 9 months x RM200 = RM1800.

If you are 30 years old now and planning to retire at 60, the difference of RM1800 will reduce your retirement nest egg.  Assume 3PF gives 6% yearly Dividend for next 30 years.

How much the difference after next 30 years?

Present Value, PV = RM1,800
Interest, i = 6%
Period, n = 30 years
Future Value, FV = RM10,338

That is a big amount due to compounding effect over 30 years.
The actual amount will also depend on your current gross salary and age.
If you are older than 30 and the retirement age is nearer, the FV amount will be lower.

So, should you maintain at 11% or just enjoy the 4% "extra" spending money?

What if you have outstanding Credit Card loan? 
Credit card is generally charging you 18% p.a. for the outstanding amount.
Then it makes more sense to use the "extra" money to reduce your credit card debts.

What if you can get a higher return by investing the 4% into other investment? 
It will increase your retirement nest egg if your investment can generate higher than 3PF returns.
If your investment not able to give higher than 3PF return, then it is better to leave the money into 3PF account.

Have you considered to invest the extra money?
If you have been giving excuses of no money to invest, this is a good time to start. The extra money can be used to start your first investment.

What about PRS?
Another good way to maintain your Retirement Fund and Save on Income Tax is to contribute the 4% to PRS. You will get up to RM3000 tax relief. If you are in the 21% tax bracket, the RM3000 contribution will save you up to RM620 (RM3000 x 21%) of tax payment.


What to avoid?
The "extra" money should not be used to buy items with the value decreased over time. For example, a new handphone. A new handphone is NICE to have, but not NECESSARY. Even if you really need a new phone, consider to buy a cheaper phone. No point spending few thousands when a newer model is coming out next year.

The decision to reduce or maintain the 3PF contribution rate should depend on what is your current financial position and future plans.

Do discuss with your Financial Consultant if you wish to know more and make a better decision.


For more information:

142) Net Investment Return

http://highlevelrules.blogspot.com/2018/01/net-investment-return.html


Newspaper article on the Announcement:
https://www.thestar.com.my/news/nation/2020/03/05/employees039-epf-statutory-contribution-rate-lowered-to-7-from-april-to-december