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Saturday, December 22, 2012

Boost your NEST EGG...How PRS works?

Malaysia's new retirement scheme - which took three years to come to fruition - is called the Private Retirement Scheme - PRS in short. While the brief introduction are covered last article, in this article we will provide more detail about PRS features, mechanisms.It have some similarity to how an Unit Trust works which the fund offers are actively managed by approved fund providers.

Before we get into the details. Let's us first introduction some PRS Lingo. Here are some of the main differences:


PRS Lingo 
PFA Asia financial planner on how PRS works

Contributors (not investors): 
They use PRS to save for their retirement.

PFA Asia financial planner on How PRS works
Contributions (not investments): 
The amount a contributor allocates to a PRS fund.

PFA Asia financial planner on How PRS works
Providers (not fund managers):
Approved asset managemnet companies that can offer PRS funds



Who is Who in PRS ?
The introduction of the private retirement scheme framework are resulted from study and  recommendations made by the Securities Commission Malaysia (SC) to the Government to accelerate development of the private pension industry in Malaysia.
Security Commission (SC) -  Underpinning the framework is a strong regulatory and supervisory structure based on the SC’s regulatory objectives of ensuring robust regulation and supervision of the PRS industry, promoting trust and confidence in the PRS and protecting interest of members.
Private Pension Administrator - which would be responsible for the operational of an efficient administrative system for the PRS industry.
PRS Providers - each offering a range of fund options under a PRS, where the assets are segregated and held by independent Scheme Trustees under a trust.


Key Features of PRS 


• PRS are defined contributions schemes where the accrued benefits to members are 
determined by the amount contributed plus investment returns thereon. The aim of 
savings in PRS is to make the members’ savings grow over the long-term.

• Members would have the option to contribute to more than one fund under a PRS or to contribute to more than one PRS, offered by different PRS Providers.

• Being voluntary in nature, there would be no fixed amounts or fixed intervals for making contributions to PRS.

• A default option would also be made available for members who select their PRS Provider but do not specify a fund option. The default option would cater for different age groups. PRS Providers would need to ensure that the relevant members are switched to the default funds in accordance with the relevant age group as shown below


Growth Fund
Moderate Fund
Conservative Fund
Age group
Below 40 years of age
40 - 50 years of age
Above 50 years of age
Parameters
Maximum 70% equites

Investment outside
Malaysia is permitted
Maximum 60% equites

Investment outside
Malaysia is permitted
80% in fixed income
instruments of which 20% must be in money market instruments and a maximum of 20% in equity

Investment outside
Malaysia is not permitted



How to contribute to PRS ?

PFA Asia financial planner on how PRS works

Individual members choose PRS Providers and funds according to their risk appetite and investment profile

 Alternatively, an employer may also channel the contributions to a
 particular PRS Provider where employees choosing the type of funds
 offered by that Provider.

In both scenario, a default option for members shall apply if the fund option is not being 
specified or selected.


Account Maintenance ?

Members would also have the option to switch funds within a PRS at any time, or change to another PRS provider once a year subject to to terms imposed by the PRS Provider. The first transfer can only be requested by a member one year after making the first contribution to any fund under the Scheme.

All contributions made to PRS will be split and maintained in sub-accounts A and B as follows: 

PFA Asia financial planner on how PRS works

The value of sub-account A and B can increase or decrease according to the unit price. The unit price is the worth of each unit held by a member from day to day. Units are priced daily.The diagram below shows an example of an individual channeling contributions to several funds under a PRS offered by different PRS Providers.

PFA Asia financial planner on how PRS works
Source : Private Pension Administrator , PPA website

Tax Incentives?

In addition to the tax deduction permitted for EPF contributions tax incentives are provided to both employers and individuals as follows:

- Individuals - tax relief of up to RM3,000 for the first 10 years from assessment year 2012; 
- Employers - tax deduction on contributions to PRS made on behalf of their employees
                       above the EPF statutory rate up to 19% of employees’ remuneration.
- A tax exemption is also provided on income received by the funds under the Schemes.
  As such, it is a double tax incentives benefits for PRS. 

  By the way, are you aware that unit trust management company return on the mutual 
  funds are taxed first at 8% before the nett return reaches the hand of unit holders ? 



1 comment:

  1. Hi there, I would like to share a 3 part article about PRS from my blog at invest-made-easy.blogspot.com

    Part 1 : Private Retirement Scheme (PRS), What’s In Store For Investors?
    http://invest-made-easy.blogspot.com/2013/01/private-retirement-scheme-prs-whats-in.html

    Part 2 : Private Retirement Scheme (PRS), What Is The Expected Performance?
    http://invest-made-easy.blogspot.com/2013/01/private-retirement-scheme-prs-what-is.html

    Part 3 : Private Retirement Scheme (PRS), Enjoying The Benefits of Tax Relief
    http://invest-made-easy.blogspot.com/2013/01/private-retirement-scheme-prs-enjoying.html

    ReplyDelete

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