Wednesday, December 3, 2008

EPF @ KWSP - Advantages and Disadvantages of 3% Cut

Are you in your EPF @ KWSP dilemma? Whether or not to opt to fill up the Form KWSP 17A(AHL) KHAS? Or just follow the new EPF @ KWSP regulation to reduce the employee contributions from 11% to 8% for the period of 2 years (Jan2009-Dec2010)? To see the options clearer, I listed out the advantages and disadvantages of the new reduced contributions to 8%.

The advantages of the 3% cut:

1) More disposable income
For those who can manage their finance well, more disposable income also mean they have more free money to plan for their own investment, be it unit trust investment or stock investment or protection/insurance plan. They can even transfer the extra $$$ to reduce their housing loan. Perhaps the money smart type can even get more return (compare to the average 6.98%) Instead of letting the $$$ to be managed by Mr EPF.

2) Help to boost private consumption and improve the global economy as a whole
If half of Malaysian wage-earners agree with the 3% cut, there will be about RM2.4bil annually circulating in the nation economy. This definitely will improve the overall health of our economy, and globally as a whole.

The disadvantages of the 3% cut:

1) More disposable income (again?)
For those who is ill disciplined on saving and budgeting, have more disposable income also mean you have more money in your pocket to buy those 'unnecessary but tempting' stuffs

2) More taxable income
The current tax-free limit on EPF contributions and insurance premiums is RM8K. Paying less EPF contributions will increase your taxable income. Meant, you will pay more to the Mr InlandRevenue

3) Less dividend paid
Well, this is simple mathematics. If you have less $$$ in the EPF account, your annual dividend will also be less.

4) Less retirement fund
This is the main reason why I would opt to maintain my EPF contributions at 11%. After all, this is the whole purpose of EPF right? - "Savings For Old Age". Even though 3% is not a significant amount, but in long run, taking into consideration of compounded interest (3% x 12 months x 2 years x (the number of retirement years)) the final amount could be enough to support your old age for a few months or years!

Bear in mind the main objective of EPF is to fund for your retirement. The choice is yours. If you are confident that you can manage your 3% better than Mr EPF, you may opt for the 8% employee contributions. If you are unsure, it's advisable to opt to maintain the 11% employee contributions.

Let's keep building our nest egg!


  1. Thanks for the article. Keep posting useful blogs.

    EPF Transfer

  2. Hi Krishna :) Thanks for your comment. You have an organised and resourceful blog too. Let's keep posting!