Don’t simply withdraw funds, experts caution

PETALING JAYA: While the new Employees Provident Fund (EPF) Account 3 or flexible account is a welcome relief to some, economists and financial planners stressed that withdrawals be made wisely.

They said withdrawals should only be made as a last resort, and be replenished through voluntary contributions when possible.

Sunway University economics professor Dr Yeah Kim Leng described Account 3 as a “reasonable compromise” between contributors wanting greater withdrawal flexibility and those concerned that the government would be forced to “bail out” retirees without adequate savings in the near future.

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He said the proposed 10% allocation for Account 3 was not excessive while contributions to Account 1, which would be raised from 70% to 75%, would address concerns of the latter group.

“While inculcating prudent spending and savings behaviour is crucial, equal emphasis is needed to accelerate income growth while concurrently implementing strategies to keep living costs low and stable,” he said.

Yeah pointed out that the economic impact of Account 3 withdrawals depends on the number and quantum of withdrawals, and the application of funds.

“If spent, there would be a temporary boost to private consumption akin to ‘short-term gain but long-term pain’ to the economy.

“With more intensive financial education and awareness, potential withdrawals from Account 3, however, could be kept to a minimum,” he said.

He said the flexible account could also be a ‘life saver’ to those in dire financial straits.

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“However, the easier access could spur dissaving and current consumption for individuals with less financial discipline,” he said.

Besides imposing strict but verifiable conditionalities, he said it could be difficult to prevent withdrawals for non-critical purposes.

“To counter this possible undesirable trend, efforts to raise financial literacy, promote savings habits and widen the savings culture will need to be intensified,” he said, adding that contributors should only dip into this savings pool as a last resort.

“If they do, it should be treated as ‘borrowing’ and should be replenished if the aggregate retirement savings target is not within reach over the remaining period before retirement,” he said.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid described Account 3 as a delicate balancing act.

“On one hand, there is a need to ensure EPF members have sufficient retirement funds but the immediate need for survival is also crucial given the cost of living remains high while salaries and wages have yet to catch up,” he said.

Mohd Afzanizam said those prudent in financial management may use this opportunity to pay off debts, which could improve their financial standing.

“It comes down to financial literacy and how members practise responsible financial management,” he said, adding that the key priorities were usually settling of debts, and basic expenditures on house rental, utilities and children’s education.

Concurring, Malaysian Economic Association president Prof Datuk Dr Norma Mansor said Account 3 would give members “breathing room” to address their immediate financial issues.

She said this would also put them in a better position and mindset to plan out their financial future.

“It will also help to inject cash into the economy, stimulating it to develop faster,” she said.

However, Norma recommended that members keep their Account 3 savings in EPF for as long as possible before considering withdrawing them.

This would provide the benefits from compounding dividends, she said.

“Members should only consider withdrawing from Account 3 if they really need to. If they do, it is highly encouraged that they replenish their EPF savings when it is feasible through voluntary contributions,” she added.

Economist Dr Geoffrey Williams said the new account will be helpful in dealing with the current rising costs of living as it provides members with easier access to emergency funds.

“This will help offset the economic impact of slow global growth and compensate for higher costs of living, especially if subsidy rationalisation causes prices to rise,” he said.

However, he warned that the new account could become a double-edged sword leading to further inflation, while reducing EPF investment in local businesses and long-term savings.

“This will have the same effect on the economy as the Covid-19 withdrawals but this time it is a windfall rather than a necessity.

“This could lead to reduced savings in the long-term accounts to begin with and make it more difficult to get to the Basic Savings level.

“The best option is to opt out of the initial transfer to protect your long-term savings and opt in to the monthly contributions if you need to access savings quickly,” he said.

Meanwhile, fund manager Danny Wong said while the new account seemed to provide flexibility, it may indirectly allow long-term retirement funds to be utilised earlier than expected.

The chief executive officer of Areca Capital Sdn Bhd added that members should be aware on how withdrawals may affect their future retirement funds.

“Members need to be educated to only make withdrawals for serious needs,” he said, adding that this comprised matters of life and death, serious illness or situations that affect livelihoods.