This article first appeared on Ringgitplus. Visit the site for more articles on personal finance.
The Malaysian government and the Employees Provident Fund (EPF) have officially announced the introduction of the EPF i-Sinar withdrawal facility
, which allows eligible members to make withdrawals from their EPF Akaun 1 to overcome financial difficulties brought about by COVID-19.
Under i-Sinar, affected members can withdraw up to RM10,000 or up to 10 per cent of their Akaun 1 savings (capped at RM60,000), depending on how much balance they have in Akaun 1.
The eligibility requirements for i-Sinar are also quite flexible, with the facility being made available to those whose income have reduced by 30 per cent and those who have not contributed for at least two months. The facility is expected to benefit as many as eight million EPF contributors overall.
Now that you can begin applying for i-Sinar, take some time to make an informed decision as to whether to withdraw or not. Our friends from RinggitPlus
have compiled a list of the pros and cons of utilising EPF i-Sinar to see what is the right decision for you.
Pro #1: Access to a large amount of funds to ease cash flow issues
Due to unemployment, unpaid leave, salary cuts, and reduced business arising from the COVID-19 pandemic, cash flow issues is a major problem for many Malaysians during this period. It comes as no surprise that many individuals and small businesses are suffering from lack of income and inability to pay for their bills and necessities, even now as the economy is slowly recovering.
The i-Sinar facility is one solution to this problem, and is especially valuable to those who have exhausted their emergency savings. EPF members can access up to RM10,000 or even tens of thousands of Ringgit depending on their Akaun 1 balance, paid out over the next six months. The first month payment of i-Sinar can be up to RM5,000, which is a huge boon for those who need a sizeable amount of cash upfront.
Pro #2: Avoid taking on more debt
A viable way to overcome cash flow issues is by making use of debt facilities, like credit card advances and personal loans. By borrowing money from the bank, you will have the finances to tide you over during the present with a set repayment schedule for the future. However, the issue with taking on debt facilities is that you usually have to pay interest – unless you utilise a zero per cent balance transfer plan
or a cash advance promotion. And even then, you’re taking a hit on your credit health, raising your credit utilisation and debt service ratio – which will affect your chances of getting a loan approved in the near future.
In comparison, you do not have to pay any additional interest on your i-Sinar withdrawals – you are just giving up the interest that you would have earned on your savings. The i-Sinar facility is also advantageous because you do not need to rely on a healthy credit score and high borrowing power to access the funds. Moreover, you get to avoid taking on an unmanageable amount of debt during a financially challenging time.
Pro #3: Helps cover commitments outside of targeted repayment assistance
Some might wonder why additional funds are necessary, given that the central bank had declared a six-month automatic repayment moratorium for individuals and SMEs from April to September this year. For those who still have financial difficulties at the end of the moratorium period, various forms of targeted repayment assistance are still made available by the banks up until June 2021.
However, loan repayments are not the only financial obligations faced by Malaysians. Even with other forms of assistance like electricity bill discounts and insurance premium deferments, these measures cannot be expected to fully alleviate one’s financial burden. Moreover, what about paying for groceries, childcare, education, rent, utilities, Internet, transportation, and various other necessities – all of which are necessary expenditure, but cannot be deferred through any form of assistance? This is where the funds from i-Sinar would be most needed by those in a financial tight spot.
Con #1: Forgoing compounding returns
One thing you will hear a lot of people talking about when it comes to withdrawing money from any form of savings is the compounding interest that you will forgo. As many will know, compounding interest is the interest you earn on both your initial deposits as well as the interest earned from that principal deposit, and the effects are greater over time. So, when you withdraw funds from your EPF account, you are not only losing out on the returns that you earn on your EPF contributions, but also the extra returns that the accumulated returns will gain.
Let us assume you withdrew an amount of RM10,000 from your Akaun 1 at the age of 30 through i-Sinar. When you take the effects of compounding returns into consideration, it’s not just the RM10,000 in savings that you will not have for your retirement. Assuming the minimum guaranteed 2.5 per cent p.a. EPF dividend yield, over the next 25 years, your RM10,000 would have been compounded into a sum of RM18,539.44 – almost double the initial amount.
The effects become more apparent at higher dividend rates. The same RM10,000 earning 6.17 per cent (the 10-year average dividend yield for EPF) will compound to a sum of RM44,673.03 after 25 years – more than quadruple your deposit!
And that’s what you forgo when you make an unreplenished withdrawal via i-Sinar.
Con #2: Lesser savings for retirement overall
Rules of compounding interest aside, you do end up with less retirement savings if you tap into the i-Sinar programme – despite it being presented as an “advance” facility as opposed to a withdrawal feature. According to the EPF, all future contributions will be channelled to Akaun 1 until the amount withdrawn under i-Sinar has been replenished. After that, contributions will revert to the original ratio of 70:30 for Akaun 1 and Akaun 2.
However, the issue with this mechanism is that you are not really “replenishing” the withdrawal amount, as you are not increasing your contributions to make up for the difference that you withdrew. You are simply halting your contributions to Akaun 2 in order to concentrate them into Akaun 1 – so in the end, you will still end up with a lower net balance than if you did not take i-Sinar.
To put it simply, unless you self-contribute more after withdrawing from i-Sinar, you will not actually be able to replace the sum that has been withdrawn.
Con #3: A risk for those with low financial literacy
The i-Sinar facility is flexible because as long as you fit the eligibility criteria, you do not have any restrictions when it comes to how you use your withdrawn EPF funds. However, this flexibility can be a double-edged sword as those with low financial literacy could be swayed into using their retirement funds in ways that are not very financially responsible.
After all, the EPF has seen it happen repeatedly. It previously revealed that a shocking 70 per cent of members who made full withdrawals upon reaching retirement age somehow exhausted all their savings within 10 years. Therefore, with such loose conditions, will everyone be financially prudent if they came across a sudden influx of funds via i-Sinar?
The EPF isn’t the only ones who are worried. The assistant governor of Bank Negara Malaysia (BNM) has come forward to caution against unethical advice encouraging EPF members to withdraw from Akaun 1 to invest in higher-risk investments. But the main concern lies on the fact that those who lack in financial literacy could also make the mistake of using i-Sinar funds for unnecessary or extravagant purchases instead of covering their basic expenses.
Clearly, this goes against the grain of what i-Sinar is meant to be – a facility for those who are in financial need.
Should you utilise the EPF i-Sinar withdrawal facility?
Just like anything else in life, there are two sides to every coin – so there is no definite answer as to whether you should or should not make use of the i-Sinar facility. If you are in tight financial circumstances, then withdrawing funds from your Akaun 1 would be a rational and useful thing to do (and you can find a step-by-step guide on how to apply for i-Sinar here).
However, if you think you could weather the current economic climate by making some lifestyle adjustments instead, then consider letting your retirement savings stay safe in Akaun 1 to reap those compounding returns.
If you are worried about jeopardising your retirement savings by using the i-Sinar withdrawal, one thing you could do is make a personal pledge to self-contribute the difference later on when your financial situation has improved.
Whether it’s later on in 2021 or even in 2022 and beyond, make it a point to self-contribute that amount back into your EPF savings.