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Changing Your EPF Contribution: How Does It Affect You?

Should you retain at 11%?


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Changing Your EPF Contribution: How Does It Affect You?

Many of you would have gotten an email or circular from your company asking if you'd like to retain your EPF contribution at 11 per cent.

The option now is to reduce it to 9 per cent. 

It may sound like a minor percentage change but before you decide if you want to keep it at 11 per cent or reduce it to 9 per cent, have a read and understand some of the facts put together by our friends from Multiply

 

If you don't already know, the guys from Multiply are the experts when it comes to financial matters.

They are a non-profit initiative by Creador Foundation which aims to help Malaysians make better financial decisions through videos, guides, blog posts, calculators, infographics and articles (like this one!).

Read on to understand more about your EPF contributions and what happens when you reduce or increase your contribution percentage.

The options

Budget 2021
The government announced in Budget 2021 that from January 2021 to December 2021, employees can contribute 9 per cent of their monthly salary to EPF instead of the usual 11 per cent, for employees below 60 years old.

The option to lower EPF contributions from 11 per cent was mainly given to help workers have more take-home pay if they had to take a pay cut during the COVID-19 crisis.

But earlier this year, the government had already announced that workers could choose to lower their contributions to 7 per cent. This was also to help workers through the crisis.

So, by January 2021, those who had lowered their EPF contributions to 7 per cent will actually have to raise it again – to 9 per cent.

Although this is lower than the usual 11 per cent, it’s still something workers will have to look out for. 

Keeping it at 11 per cent

EPF members who want to keep on contributing 11 per cent of their salary have to fill in Form KWSP 17A (Khas 2021) available on EPF’s website. They need to submit their form to their employers, who will then send it to EPF.



Employers’ contributions to EPF however, will stay the same – If you earn RM5,000 or below a month, your employer is required to contribute 13 per cent of your salary to your EPF and if you earn more than RM5,000, your employers contribute 12 per cent. 

But whether you’re now contributing 7 per cent and have to raise your contributions to 9 per cent, or if you’re still saving 11 per cent of your salary in EPF and are thinking about lowering to 9 per cent, let’s look at how it’ll affect you. 

More or less cash?

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Dividends you can earn

More returns.
Your EPF savings earn a guaranteed return of 2.5 per cent every year. From 1999 to 2019, EPF has been paying an average dividend of 5.61 per cent a year.

The more you contribute to EPF, the more dividends you can earn, because your dividend payments are based on your overall total savings.

So, if you have to raise your contribution from 7 per cent to 9 per cent, you’ll not only increase your retirement savings, but also increase your dividend payments.

But if you lower your contribution from 11 per cent to 9 per cent, you’ll have less retirement savings and dividend payments.

And the more you contribute, the more you’ll get in dividends. So if you can afford it, it’s probably safest to keep your contribution at 11 per cent so you can get maximum returns from your EPF savings.

Tax relief

You can claim up to RM4,000 tax relief every year if you contribute to EPF. 

So the more you contribute, the more you can deduct from your chargeable income up to a maximum of RM4,000.

Lesser tax.

This will reduce the amount of tax you have to pay. So, if your contributions go up to 9 per cent from 7 per cent, you can claim more tax relief.

If you’re contributing 11 per cent and lower it to 9 per cent, this might reduce the tax relief you can claim, increasing the tax you have to pay.

But remember, this would depend on your current situation, since the tax relief is only up to RM4,000.
 

So, what’s your next step?

Your next step will depend on if you need to raise your contributions to 9 per cent from 7 per cent, or if you’re going to lower your contributions to 9 per cent from 11 per cent. 

As said before, if you need to increase to 9 per cent and you will have less take-home pay every month.

It's going to be slightly tough to readjust but if you need some help, you can read Multiply's guide on planning and budgeting or use the budget calculator to help you manage your new financial situation.

Budget and plan.
You could also read on money-saving tips or use Multiply's savings calculators to help you achieve your goals.

At the end of the day, if you can afford it, you should definitely keep contributing at 11 per cent because it will help you be better prepared for your retirement. You’ll also get more dividend payments and you might be able to claim more tax relief. 

For more information on your contributions, you can refer to EPF’s website or contact EPF at  03-8922 6000 (Mon – Fri 8.00 am – 5.00 pm).

To learn more about planning your finances for retirement, read Multiply's guide on retirement planning and saving for your retirement with EPF


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