According to a report by Prudential Malaysia, only 35 per cent of Malaysians are satisfied that the Employees Provident Fund (the state pension equivalent) will be sufficient to meet their income needs in retirement, and yet only 17 per cent are worried enough to take action. Sound familiar?
The Malaysian EPF system is mandatory and contributions are based on monthly income. 11 per cent is deducted from the employee’s salary, and the employer contributes 12 per cent. Savings are secure and while they are invested in underlying asset-backed investments, there is a minimum guaranteed dividend of 2.5 per cent per annum. Pretty much everyone in Malaysia is treated as though they are an employee unless, interestingly, they happen to be a nomadic aborigine, a domestic servant, detained in prison or part of a leper colony.
At certain lifestages the member becomes eligible to withdraw their money, and herein lies the rub. Some money can be withdrawn prior to age 55 to assist with the deposit for a first property purchase or, under recent new legislation, to pay for mortgage protection critical illness policies. All of the money is repaid to nominated beneficiaries on early death, and can also be refunded on incapacity.
At retirement from age 55 onwards (50 in certain circumstances) the whole amount can be withdrawn in one lump sum (unless the member is still working). Alternatively, monthly payments can be made for a minimum of 12 months.
It does not take the brains of a rocket scientist to work out which option most take.
Most Malaysians have withdrawn (and spent) their total monies within three to 10 years. While the average life expectancy in Malaysia is a lot less than the UK, it does mean that the older population are either having to rejoin the workforce, rely on family to support them or starve.
This is a worrying trend, as is the significant increase in personal debt, especially as the general cost of living is relatively cheap. The credit crunch storm is brewing and bankruptcy among 25-35 year olds is on the rise. Sound familiar?
The situation is not helped by the fact that the EPF is pretty much the only way that Malaysians will consider saving towards retirement.
Although unit trusts and ETFs are available, they do not appear to be widely marketed. The regulator does not allow private pension schemes, and the current taxation system renders annuity type products unattractive.
To overcome this, Prudential Malaysia has launched the Prulink Income fund, which allows a lump-sum, fixed-term investment (with full capital accessibility) followed by a fixed guaran-teed payout period (not necessarily until death), and a potential lump sum invest-ment at the end. It certainly looks very attractive, with underlying guarantees and it does address the regulators’ issues, but only accepts lump sum investments.
While we as advisers may have many issues with our UK retirement planning system, the fact that pension money is inaccessible until later in life and then with restricted options is probably no bad thing. In addition, we are lucky that we have plenty of choice and flexibility in the ways that we can save.
Will the NPSS be the death knell for retirement advice in the UK, or will mandatory contributions be a good thing to supplement our burgeoning state system?
We may moan about annuities and the limitations on our pension income, but maybe it is not that dire. The poverty line would be very much lower if Joe Public followed the Malaysian way.
Fiona Sharp is a senior adviser at Finance4Women