Reduced EPF Contribution Rate: The Pros and Cons

Are you in your EPF dilemma on the reduced EPF contribution rate?

Whether or not to opt-out and maintain your EPF contributions at 11%? And to fill up the Form KWSP 17A(AHL) KHAS. Or to just follow the new EPF regulation to reduce employee contributions from 11% to 7% for 9 months (April 2020 until December 2020)?

To see the options clearer, I listed out the pros and cons of the reduced EPF contributions rate from 11% to 7%.

Pros and cons of reduced EPF contribution rate

I share both the pros and cons of the EPF 4% cut below.

The pros of reduced EPF contribution rate

These are the advantages of a reduced EPF contribution rate:

1. More disposable income

For those who can manage their finance well, the more disposable income also means they have more free money to plan for their own investment. They can use this money to invest in a robo advisor, unit trust investment or stock investment.

They can even transfer the extra money to reduce their housing loan.

2. Help to boost private consumption and improve the global economy as a whole

If the majority of the Malaysian wage-earners took up the move, there will be more money circulating in the national economy. This definitely will improve the overall health of our economy, and globally as a whole.

Cons of reduced EPF contribution rate

And these are the disadvantages of the EPF 4% cut:

1. More disposable income (again?)

For those who are less disciplined in saving and budgeting, having more disposable income also means you have more money in your pocket to buy that unnecessary but tempting stuff.

If the money is kept at EPF, you can’t touch it. So, you won’t spend it.

2. More taxable income

The current tax-free limit on EPF contributions and insurance premiums is RM8,000. Paying less EPF contributions will increase your taxable income. There are possibilities this shall increase your taxable income.

3. Received fewer dividends

Well, this is simple mathematics. If you have less money in the EPF account, your annual dividend will also be less too.

4. Less retirement fund

Lastly, reduced EPF contribution leads to less money in your retirement fund.

Even though 4% is not a significant amount, over the long run, taking into consideration of compounded interest the final amount could be enough to support your old age for a few months or years.

How to opt-out of the reduced EPF contribution rate?

Now, do you wish to maintain your contribution rate at 11%? If yes, you must be wondering how you can opt out of the reduced EPF contribution rate.

It’s simple.

You’ll need to inform EPF and your employer by filling in and submitting Form KWSP 17A (Khas 2020) (PDF).

Final thoughts

Bear in mind the main objective of EPF is to fund your retirement. The choice is yours. If you are confident that you can manage your 4% better than EPF, you may opt for the 4% employee contributions.

If you are unsure, perhaps you can consider opt-out and maintain the 11% employee contributions. Let’s keep building our nest egg!