Experts: Those opting for 3% cut will lose money

PETALING JAYA: Employees opting to take the 3% cut in their Employees Provident Fund (EPF) contribution will end up losing thousands upon retirement.

While the monthly deductions cover a 22-month period beginning March 2016 to December 2017, the loss of compound interest on the sum would leave a dent in an employee’s retirement savings.

Independent economist Lee Heng Guei said the lower income group would be the most affected as many would have not met the RM196,000 recommended minimum savings level needed to sustain them until the age of 75.

“It may provide extra cash but the reduction would mean less savings over the 22-month period.

“This would mean losing out on compound interest for the amount,” he said in an interview.

He said the amount affected would depend on the deduction based on an employee’s basic salary.

For example, Lee said a 30-year-old employee earning RM4,000 a month may get an extra RM120 a month for 22 months but would end up losing RM10,006 at 55 in compound interest set at a constant annual interest rate of 5.5%.

Unless it was necessary, Lee said it was better to let the money flow into their EPF retirement fund.

For employees earning RM5,000 they would get a total of RM3,300 extra over 22 months but lose RM12,813 upon retirement while the loss balloons to RM25,168 for an employee who earns RM10,000.

Whitman Independent Advisor’s managing director Yap Ming Hui said the EPF serves as a retirement fund and those seeking to take the 3% will only disrupt their savings momentum.

He added there was also the danger that some employees may use the extra money to invest or make purchases on instalment.

“They may become dependent on the extra money to invest or pay for their instalments.

“However, the extra cash will end in December 2017, leaving them with less money to manage their expenses,” he said.

A financial adviser, who only wanted to be known as Wong, said many in the lower income group would be the most affected.

“They will be paying Goods and Services Tax when they spend the extra cash while saving less in the EPF,” she said.

She advised employees not to take the reduction to allow their retirement savings to grow.

Employees currently contribute 11% of their monthly salary to EPF but the latest measure in the revised Budget 2016 to be implemented in March will automatically reduce this to 8%.

When a 3% deduction in contributions was implemented from January 2009 to December 2010, some 2.2 million or 40% employees opted to maintain their 11% monthly contribution.