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How much is the contribution rate?
A contribution constitutes the amount of money credited to members’ individual accounts in the EPF. The amount is calculated based on the monthly wages of an employee. The current rate of contribution is 23% of the employee’s wages of which 11% is from the employee’s monthly wage while 12% is contributed by the employer.

Effective 1 January 2007, the Account is divided into two parts, namely Account I and Account II. Contributions received on your behalf from your employer will be credited into the two accounts according to the following percentages:

1) Account I - 70% of monthly contribution
2) Account II - 30% of monthly contribution

What are the types of withdrawals available?

1) For Account I
Savings in this account is meant to be used for your retirement, and it cannot be fully withdrawn before you reach the age of 55, become incapacitated, leave the country or deceased (payment will be made out to your nominee / heir).

You are allowed to invest part of this savings to allow you to add the value of your savings.

2) For Account II
Savings in this Account is meant to help you to make early preparations for a comfortable retirement. Withdrawals are allowed for the purposes of:

(i) Attaining the age of 50 years;
(ii) Owning a house - the downpayment for your first house;
(iii) Settling the balance of your housing loan - first house;
(iv) Financing education for you and that of your children’s;
(iv) Medical expenses for you and that of your children’s

Where are they invested?
Your monthly contributions are invested in a number of approved financial instruments to generate income. They include Malaysian Government Securities, Money Market Instruments, Loans & Bonds, Equity and Property.

Source: www.kwsp.gov.my

An endowment insurance policy is structured more like a savings account than an insurance policy and to help us easily understand the endowment policy, we can basically dissect the endowment policy into 2 main components- Savings and Insurance.

What’s an Endowment Policy and How does it Works?

(1) The Savings Component
For most endowment policies in the market, you can opt to save for a period of 12 years, 15 years, 18 years, 21 years, 24 years, 27 years or 30 years. For instance, if you choose a 21-year endowment policy, your savings will mature 21 years later and the policy will be considered void. At the end of the 21 year period, you shall receive a big fat cheque from the Insurance Company.

Most endowment policies allows you to make regular withdrawal, which is usually every 3 years once. Like any whole-life policies, you can also apply for policy loan. Regular withdrawal can affect the outcome of your savings, since every withdrawal you made will reduce the total cash amount in the policy.

(2) The Insurance Component
The insurance component is also pretty straighforward. In the event of a Death or Total Permanent Disability (TPD), you will be paid the Insured Amount. However, if you are diagnosed with Critical Illness, the premium of the endowment policy will continue to be paid by the Insurance Company, of course, until you kick the bucket.

In the case of the father setting up the endowment policy for his kid, the insurance component would work slightly differently. If the kid kicks the bucket first or suffer from TPD, the same thing applies- the Insured Amount stated in the Endowment Policy will be paid out, in this case, to the father. If child is diagnosed with Critial Illness, the Company will continue to sponsor the policy. Let’s say if the Father kicked the bucket first, suffer from TPD or diagnosed with Critical Illness, the Company will sponsor the kid until the policy matures.

For the scenarios shown above, you should refer to the Insurance Companies’ respective riders that is attachable to the endowment policy and understand the terms and conditions to fully take advantage of the policy.

Why an Endowment Policy?

So, after going through the mechanics of how an endowment plan works, what’s the purpose of getting one?

An endowment policy works great as a passive retirement fund. Since the policy does not actively invest in shares and equities, the returns from an endowment policy is somewhat predictable. For business owners who doesn’t contribute to KWSP, the endowment plan is a great substitute.

An endowment policy is also usually used to structure a child’s education fund, since it gives basic protection to the kid and most importantly, the policy allows waiver of premium should anything happens to the Payor.

Also, you can use an endowment plan to distribute your estate or to setup a trust fund. Compared to tangible assets like properties or jewelleries, the endowment plan is much more transparent and hassle-free.

Create Now Save Later or Save Now Create Later?
The underlying concept of an endowment policy is to create now and save later. This basically means that the moment you start an endowment policy, the amount of wealth is created on the first day itself. Say if you are thinking of saving RM 300,000 for 30 years, the endowment policy would create the RM 300,000 in paper value. If any misfortunate incident (either through Death, TPD or Critical Illness) should stop your contribution to this policy, the RM 300,000 will be paid out. That’s the “Create Now” phase. Hence, “Save Later” means you have the option of contributing to the policy regularly.

A typical example of “Save Now and Create Later” strategy is a normal savings account, whereby contributions is made now and the results is seen years later. You don’t get compensated if anything goes wrong in the wealth creation journey, since there’s no insurance componenet involved.

The Downside
Nothing good comes without drawbacks. An endowment policy should be setup with the appropriate contribution amount. Unlike a savings account, you are unlikely to be refunded in full if you decide to terminate the policy in the first 10 to 15 years of the policy.

Unlike an investment funds, the endowment policy lacks liquidity and aggressiveness. This means you should not expect double digit annual returns from your endowment policy.

And that wraps up the Endowment Insurance for this section. If you have any questions, do post it in the comments below.

In the next section, I am going to be covering on Whole-life Insurance.

It’s already quite rare to find people who are actively planning their retirement.

Nope, your existing KWSP contributions don’t count. You actually need more than the monthly 23% you are contributing if you intend to upkeep your existing lifestyle after you receive your last paycheck, and provided that post-retirement inflation don’t screw up your plans.

One of the most overlooked factor in retirement- your health.

Yup, even with the best retirement planning strategies, you might not be able to enjoy the millions you have accumulated in your retirement nest. There’s hardly any use of the money you have in the bank if you can hardly move around much. You might end up using your hard earned savings for medical bills.

Health-deteriorating activities will also works against your retirement goals. For instance, smoking is one good way to destroy your lungs, if the pollutants in big cities hasn’t already done so. Not only are you spending quite a sum in your daily cigarette consumption, you might also be spending alot of money on lungs related medical expenses after you retired. There are better ways to invest in tobacco, such as buying tobacco counters like BAT which gives great dividends (on the expenses of other smokers).

And like any good retirement strategy, strategies for good health should be implemented as early as possible.

Not long ago, KWSP met up with the FMUTM people and announced that every single sen that goes out from KWSP to any EPF-appointed private fund management companies, the service charge will be capped at 3% (industry standards is around 6% for growth funds).

Very soon, another welcomed change would be implemented- each age level would have its own minimum savings limit in their Account 1.

In the previous system, regardless of your age, you must have RM 50,000 in your Account 1, and anything more than RM 50,000, you can take 20% of it to invest into a private fund. This would mean that you can only start investing your KWSP savings very much later in life, since not many people in the average workforce can accumulate RM 50,000 very early in their life (averagely 35-40 years old).

Coupled with the recent change of 3% service charge cap, this new change will enable many fresh graduates and young executives to utilize unit trust for better returns on their KWSP savings.

I just got a circular from one of the fund management companies that summarizes the new revised structure.

Age	Min Savings (RM)
18	1,000.00
19	2,000.00
20	3,000.00
21	4,000.00
22	5,000.00
23	7,000.00
24	8,000.00
25	9,000.00
26	11,000.00
27	12,000.00
28	14,000.00
29	16,000.00
30	18,000.00
31	20,000.00
32	22,000.00
33	24,000.00
34	26,000.00
35	29,000.00
36	32,000.00
37	34,000.00
38	37,000.00
39	41,000.00
40	44,000.00
41	48,000.00
42	51,000.00
43	55,000.00
44	59,000.00
45	64,000.00
46	68,000.00
47	73,000.00
48	78,000.00
49	84,000.00
50	90,000.00
51	96,000.00
52	102,000.00
53	109,000.00
54	116,000.00
55	120,000.00

Based on the table above, you can use the following formula to calculate how much you can invest your KWSP money into a privately managed fund:

Amount you can invest = (Amount of money you’ve in your Account 1 - Miniumum savings according to your age) x 20%

Example, a 29 year old with RM 50,000 in his Account 1 would be able to invest:

= (RM 50,000 - 16,000) x 20%

= RM 34,000 x 20%

= RM 6,800

If you find these calculations too troublesome, just bookmark this page as I’ll be updating the old kwsp investment calculator with a new one soon.

Flexible Age 55 Withdrawal (By 1st November 2007)

(a) Members may withdraw all their savings in a lump sum;

(b) Members may withdraw their savings according to a pre-determined amount and at any time (minimum RM2,000 in every 3 months).

(c) Monthly Withdrawal (minimum amount of RM250.00 a month for at least 12 months).

Members may also opt to combine payment mode (b) and (c).

Monthly withdrawal means that a member makes an age 55 withdrawal and opts to receive the withdrawn amount every month, in a pre-determined number of months.

Member has to decide the amount to withdraw and the number of months to receive the withdrawal payment.

Every month, the member will receive the monthly payment direct-credited by the EPF, according to the number of pre-determined months. The minimum amount for every monthly payment is RM250.00 for a minimum of 12 months period.

Withdrawing at any time means that a member makes an age 55 withdrawal and opts to withdraw his/her savings according to any amount he/she prefers, at any time he/she decides according to the needs.

This withdrawal method allows the member to withdraw any amount not less than RM2,000 in each withdrawal, in a minimum 30 days cycle.

This is just like withdrawing money from a bank, but with a minimum of RM2,000 for each withdrawal, every month.

Withdrawals for savings more than RM 1 million (By 1st November 2007)

This means that members who have savings in excess of RM1 Million may withdraw the amount which exceeds the 1 million mark any time, at any age.

Savings in excess of RM1 Million can be withdrawn in totality (all) or in any amount not less than RM100,000 once in every 3 months.

To be in-line with all other pre-retirement withdrawals which allow withdrawals from Account 2, the withdrawals for savings in excess of RM1 Million can be withdrawn from Account 2 first. Additional amount can then be withdrawn from Account 1.

This is ensure that members with high income have at least RM1 Million in their Account 1.

Administrative Streamline (By 1st November 2007)

(i) Incapacitation benefit claims to be made within 12 months;
(ii) Death benefit claims to be made within 6 months;
(iii) Withdrawal amount disputes to be made within 12 months;
(iv) Disputes of authenticity of withdrawal to be made within 6 months;
(v) Additional penalties involving jail sentence or fine or both, will be imposed on forgery / fraudulent cases.

Housing Loan Withdrawal (By 1st January 2008)

Withdrawal of approved amount from Account 2 for payment of 1 home installment.

Restructure of Unit Trust Investment (By 1st February 2008)

Allows members of all age brackets to invest as long as their account amount exceeds the required savings amount.

Extension of Contribution Age (By 1st February 2008)

(i) Employees aged between 55 and 75 are required to contribute a minimum statutory rate of 5.5% a month
(ii) Dividend payment to be extended to age 75.

Critical Illnesses Policy Withdrawal (By 1st June 2008)

Savings from Account 2 can be withdrawn to purchase critical illness insurance for oneself and family members.

Topping Up Account 1 (By 1st June 2008)

(i) Members top-up parents’ accounts;
(ii) Members top-up spouses’ accounts.

Matrimonial Property Claim (By 1st June 2008)

Claim for a spouse’s savings will be paid to the claimant when he or she reaches age 55.

Mandatory contribution payment via electronic mode (By 1st June 2008)

(i) Use of electronic medium to pay employees contributions;

(ii) Fines will be imposed for employers who fail to comply.

Age 50 Withdrawal (By 1st January 2013)

This withdrawal enables you to withdraw all your savings in your Account II upon attaining 50 years of age to help you in making preparations for your retirement.

The EPF will send the pre-printed KWSP 9B (AHL) withdrawal form to its members three months earlier than the attaining 50 years old date. The form will only be sent to members who have updated their address in the EPF’s records. If you wish to receive this service, please ensure that you update your address by completing the KWSP 3 (AHL) form.

Download: Form KWSP 9B (AHL)

Sources: www.kwsp.gov.my

Another Securities Commission Approved Course by Financial Planning Association Malaysia (FPAM)…

When the business one builds begins to bear fruit and the future of the business looks bright, the wealth of the business owner continues to grow. It is important to have an estate plan for the business because it forms a large part and most probably the most valuable part of a business owner’s estate. The next step for a business owner is to plan for his estate including devising an exit stra tegy from the business he built but at the same time to ensure continuation of the business by the co-owners as well as protecting the value of that business.

Business value protection or business succession involves planning for the smooth transfer and continuation by the co-owners due to retirement, death, illness or disability. This seminar will answer key questions for business owners such as:

a)When a business owner decides to retire or suffers a life threatening illness or dies, is there a proper exit strategy put in place?

b)Is the exit strategy stated in writing to ensure smooth transfer and continuation of the business? Has it been structured properly?

c)In the event of death or disability, can the heirs of the business owner manage the business with the co-owners? If no, will the heirs be compensated in any way to ensure adequate income for them?

d)Will the co-owners have the available funds to be able to purchase your interest or shares when the time comes to do so?

Speakers: Mr Azhar Iskandar Bin Hew
Date/Time: 19th January 2008 / Saturday [ full day ]
Venue: Dewan Berjaya, Bukit Kiara Equestrian & Country Resort, KL

For more details, please visit our website : www.fpam.org.my or click here:
http://www.fpam.org.my/pdf/07/reg-ce-080119.doc

Hot news from the KWSP news desk…

Members of the Employees Provident Fund (EPF) will pay 50 per cent less in service charges for investment in unit trusts from January 1, 2008. The EPF announced that the service charges would be capped at three per cent, and fund management institutions cannot impose service charges beyond that.

This move as approved by the Minister of Finance will help members save on service charges. The service charges by local investment funds in Malaysia currently are relatively higher when compared with other countries like Singapore, United Kingdom, Japan and the United States.

“Members can enjoy better returns from their investment in unit trusts with the lower service charges,� said Datuk Azlan Zainol, Chief Executive Officer of the EPF.

Datuk Azlan also added, “We decided to cap the service charges at three per cent in the interest of our members and the fund managers�.

Currently members pay about five to six per cent in service charges.

“A study commissioned recently by EPF revealed that one of the major factors affecting the investment returns for our members is the high service charges imposed by the fund management institutions,� said Datuk Azlan.

How would the private fund management companies response to this initiative by KWSP?

Well, first of all, if initial service charges (ISC) for cash investment still maintains at 5-7 percent, such a move will definitely attract more EPF investment from the public, since everyone, almost everyone, likes a discount.

Also, with a double-standard such as this, what is the justification that cash investors are not allowed lowered ISC?

One major difference between EPF investment and cash investment is that the returns made from EPF investment is not withdrawable as cash, while with cash investment, you can withdraw the cash proceeds from the investment anytime you like.

I see this as a welcoming move, as long as the private fund management companies do not impose any double-standard policies on EPF investors, such as limiting investment from EPF to certain funds only.

Striking a balance between preserving and accumulating wealth can be quite tricky.

As I was discussing with my client moments ago, he was wondering if he should start investing his money into a mutual fund, rather than allocating his yearly bonus and salary increment into upgrading his existing insurance coverage.

For someone in his mid 20s, I suggest that you should always take up a comprehensive insurance coverage, but not an excessive one. At this age, you probably don’t need a RM 500,000 critical illnesses plan, nor a “Super VIP” hospitalization package. Just get moderate coverage with flexibility that allows you to upgrade in the near future.

I recommend that after having a comprehensive (not excessive) coverage, invest about 10% to 15% of monthly income in an aggressive mutual fund, without the intention to withdraw it for the next 5 years at least.

The logic behind such a strategy is that you should always cover any potential leaks by insuring your piggy bank before you start saving coins in it. Imagine what would happen if your piggy bank was accidentally damaged without sufficient coverage. All the investment including the interest that you could have made in your mutual funds might just be used up entirely to salvage the damage. Hence, a proper balance is always a good strategy.

What’s your strategy at this moment?

There are some major developments and changes to the KWSP allocations and it’s going to really affect how you will be enjoying the fruit of your labor.

The ‘Beyond Savings’ initiative is prompted by the EPF’s desire to enhance financial security in retirement in the light of inflation, a weakening extended family system, longer life expectancy and escalating medicals costs.

“The EPF’s main concern is the adequacy of savings for members during their retirement years as the average retirement savings for EPF members currently is inadequate. With Malaysians having a longer life span as well as inflation and escalating medical costs, many members may find themselves with insufficient funds if the issue of adequacy of savings is not addressed now,� said Datuk Azlan Zainol, Chief Executive Officer of EPF

Source: KWSP’s Website

Some facts, figures and proposed implementations:

Fact 1: 98% of EPF members withdraw their money at age 55, and 80% of them exhaust the fund in just 3 years.

Fact 2: According to Azlan, there are about 4,700 members with savings of more than RM1 million.

Fact 3: As of November, EPF members can withdraw a minimum of RM2,000 at any time, at intervals of at least 30 days.

Proposed 1: To discourage lump sum withdrawals, ad-hoc withdrawals will be introduced.

Proposed 2: Allowing members to use savings in excess of the “basic sum�in Account 1 for approved investment products (February 2008)

Proposed 3: Allowing members to withdraw savings from Account 2 to purchase critical illness insurance policy for themselves and immediate members (June 2008)

Proposed 4: Allowing children to top up parents’ savings in Account 1. Spouse can do this for each other too. (June 2008)

Proposed 5: Making it mandatory for big companies (more than 1,000 staff) to contribute via electronic mode. (June 2008)

Proposed 6: It will also soon be mandatory for employees aged 55 years and above to contribute to the EPF.

Proposed 7: Allowance for members of any age whose total savings have exceeded RM1 million to withdraw an amount in excess of RM1 million at any time to invest on their own.

Proposed 8: Members must have RM120,000 in Account 1 at age 55 to be able to withdraw their savings in Account 2 (January 2013).

Yes, and I get people asking me that all the time. If you are reading this, you’d probably asked someone that very same question- “Is now a good time to go into the market?”

Well, to answer that, I usually have a handy chart that shows 3 investor- one is a high school kid, another one is college fresh graduate and a senior position manager. Three of them invest the same amount of money each year, with the high school boy investing for the first 3 years, while our fresh grad invest for 10 years and our senior manager, only realizing the importance of retirement decided to invest for the next 20 years.

And in this scenario, let’s just assume all 3 of them retired at the same age- 60 years old. Let’s look at the chart below:

Besides appreciating the impact of compound interest can have on your money, the point I would like to illustrate here is that it really doesn’t matter how the market is doing today, or tomorrow or next week, but it’s how LONG you can keep the money in the game that matters most.

Another question most commonly asked is- “Should I invest one lump sum or should I spread the money into a few phases?”

Again, in the long term view of things and backed by historical data, lump sum investment is the way to go. As you can see from the chart below, the Fresh Grad managed to out-beat the high school kid if he’d invested the $30K, instead of spreading the $30K into a 10 year period. However, sadly for our senior manager who only thought about investing much later in his life couldn’t do anything to out perform the other two (unless of course he struck the jackpot in the casino).

Of course, if you don’t have “lump sum”, a regular investment is still better than nothing!

Scott Burns sums it up best when he gave the following example:

One of the best exercises to demonstrate this was done years ago by the American Funds group. They told the story of two investors. One had an uncanny knack for selecting the best day of the year to invest – the day prices were lowest. The other had an uncanny knack for selecting the worst day of the year to invest – he unerringly invested at market tops.

At the end of a 10- or 15-year period of annual investments, there is very little difference between the two investors. What is important is that they have invested over a long period of time.

Any future investments you make will work to diminish the impact of having picked a bad day.

So if somebody ask you when is a good time to invest, the answer should be pretty simple- right now, lump sum!

And hopefully with this short explanation, I can reduce the number of this question by 10%… and you can help me do that too!