Thursday, 10 January 2013

Private Retirement Scheme (PRS), What's In Store For Investors? - Part 1

While many investors are excited with the latest investment vehicle in the form of DanaInfra Retail Sukuk which is schedule to be listed in our Bursa Malaysia somewhere in February 2013, I for one decide instead to blog about Private Retirment Scheme, or in short PRS.

In one of my older post, I did share the PRS FAQ from Security Commissions yet couldn't find myself to finish reading the entire FAQ. Being an Amateur Investor, this is my own attempt in trying to explain PRS. While I am writing this post, I am actually learning and sharing that knowledge with everyone. I hope you'll enjoy reading about PRS in this articles as much as I suffer enjoy writing it!

What the heck is PRS?
"PRS is an investment scheme that facilitates the accumulation of retirement savings through voluntary contributions. The PRS is designed to complement the Employees Provident Fund (EPF) and is regulated by the Securities Commission Malaysia (SC)." 

Simply said, PRS is another form of investment option for us to save up for retirement. PRS is somehow similar to our EPF whereby your investment is locked away only to be made available upon retirement. The difference is that we get an option to choose our investment risk unlike EPF where the investment nature is more conservative (check out our EPF annual returns HERE)

Do be reminded that PRS does not replace the function of EPF, rather it provides an additional option for investors to save up for retirement. There is no fixed amount that you need to contribute and neither are you required to contribute monthly to PRS. 

Investing in PRS is similar to investing in Unit Trust albeit with a couple of small differences which I would highlight later. Just like Unit Trust, PRS provides investors with the options to select what kind of fund they would like to invest, the risk level, islamic or non islamic, area of investment and the amount to invest in.

Where can I buy PRS fund from?
Currently there are 6 approved PRS Providers (Securities Commission Malaysia approved financial entities that can offer PRS type funds to the public) consisting of:
1. CIMB Principal
2. Manuflife
3. Hwang Investment
4. RHB Investment
5. ING Funds

PRS Funds can be purchased from PRS providers, sales agents, banks or online platforms.

What type of PRS Fund is available?
Each approved PRS Providers must provide a minimum of 3 types of fund. These funds are called Core Funds which consist of:

Core Funds are categorized according to the age group of investors. The older you are, the lesser risk the fund you are recommended to invest in.

In addition, PRS Providers are also allowed to provide Non-Core Funds for investors. Therefore you will also be finding high risk PRS funds (70-99% of NAV invested in Equities) being made available for the young and dangerous adventurous.
Are you Young and Dangerous when it comes to investing??
Investors regardless of their age are given the freedom to select any PRS fund suited to their risk appetite.(I hope I am right on this). Never the less, it is highly recommended by Securities Commission Malaysia that investors pick the fund that is designed according to their age group.

Who is looking after my PRS Investment?
Before you can start investing in a PRS Fund, it is required to register an account with an independent body called Private Pension Administrator (PPA). PPA acts on behalf of their members in terms of:

- Facilitating and maintaining all PRS-related transactions made by members;
- Facilitating portability between PRS providers; and
- Undertaking promotion and general education/awareness on PRS.

A PPA account consist of two sub-accounts. Sub-account A comprises 70% of contributions and sub-account B which comprises 30% of contributions. Full withdrawals from the PRS account can only be made upon the satisfaction of certain criteria* and partial-withdrawals can only be made from sub-account B subject to restrictions and penalties**.

*Reaching the prevailing retirement age, death or leaving Malaysia permanently.
**Members may only withdraw the amount in sub-account B once a year. The withdrawal amount is subject to a pre-retirement withdrawal fee of RM25 and also a tax penalty of 8%. The tax penalty will be deducted before the balance is credited to your account. The first pre-retirement withdrawal is allowed only after a year from the date of the first contribution by the PRS contributor. Subsequently, pre-retirement withdrawals will be allowed once in every calendar year.

How does PRS Works?
To understand the above, I use the analogy below:

Your Money : Prisoner
PRS Provider : Prison Cell
PPA Account : Prison Database
PPA : Prison Warden
Term of release from Sub-account A : Your Retirement Age
Term of release from Sub-account B : Your Retirement Age
Withdrawal fee RM25 & Tax Penalty of 8% : Bail money if you intend to release prisoners from Sub-account B before retirement age

The concept is for you to send your money(in this case the prisoner) into prison every time you've extra and/or on a monthly basis. The term of imprisonment for your prisoner is till your retirement age. All your money will remain in prison (PRS Provider) and will be governed by the Jail Warden (PPA). Each prisoner (each investment) you send to jail is then tracked via a Prison Database (PPA Account).

You're only allowed to release one prisoner per year by paying a withdrawal fee of RM25 and tax penalty of 8% from the amount withdrawn. Therefore it is best for you to leave your prisoners in prison and let them work hard till you retire!

Why PRS for Retirement?
Like it or not, when deciding to invest in PRS, we are actually forcing ourselves to save+invest additionally apart from depending entirelt on EPF for retirement. The problem with depending entirely on EPF for your retirement is:
1. The average annual return of EPF for the past 5 years is only 5.5% (to slow lahhh...)
2. Inflation is about 3-4% and might rise higher in years to come.
3. The amount accumulated in EPF when reaching retirement is insufficient to cover the expenses of a person who has retired.

Allow me to expand on point number 3 by taking a look at the Table for Average Accumulated EPF Savings for Malaysian as of 2011:

Let's do a couple of case studies based on the figure above:

Case Study 1 - Investing my EPF when I retire (case of too little too late)
Now say for example I retire at 55 with RM130,833.03 in my EPF account. I decide to withdraw all that money and invest in a fixed income fund earning about 6% a year and live on the yearly returns. That would come up to about RM7850 per year or RM654.17 per month! Not too sure if I can live comfortably with that amount. Seriously, Money No Enough lerrr...

Case Study 2 - Living on EPF (case of being too old fashioned)
I decide not to invest but to withdraw all the money from EPF and keep it under my bed. Instead, I'm going to slowly use that money till I meet my Maker at about 75 years old (if I live longer then 75, the God help me!).

With RM130,833.03 and 20 years to live, I'm allowed me to spend an average of RM545.14 per month or RM17.58 per day. By the way how much does that loaf of bread cost again?

Obviously bigger income earners tend to contribute more to EPF and should have sufficient money saved up by retirement. Never the less, wouldn't you prefer to live a better and more comfortable life during retirement?  Would you not prefer to have the extra to go on an annual holiday with your loved ones? I seriously doubt the same can be said for Case Study 1 and Case Study 2!

In the second part of this PRS series, I would be writing about the immediate benefits you get from PRS, what are the funds available and what would the expected performance of these fund be. If you like this article, please do the following:
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Till then, Cheers and Happy Investing!

Read Part 2 : Private Retirement Scheme (PRS), What Is The Expected Performance?

Read Part 3 : Private Retirement Scheme (PRS), Enjoying The Benefits of Tax Relief 

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