EPF Account 3, a boon or bane for retirement savings?

SHAH ALAM - The introduction of Account 3 within the Employees Provident Fund (EPF), representing a segment of members' retirement savings, may not prove advantageous for individuals who fail to plan carefully for their long-term financial goals.

Experts said prematurely or excessively withdrawing funds from EPF Account 3 could result in inadequate savings upon retirement, ultimately forcing individuals to pinch pennies and rely on external assistance.

Recently, EPF announced that it was set to introduce a new account, in which Account 3, comprising 10 per cent of future monthly contributions, starting May 2024.

This adjustment marks a shift from the current 70:30 ratio between Account 1 and Account 2.

The restructuring is expected to allocate 75 per cent of monthly contributions to Account 1, 15 per cent to Account 2, and 10 per cent to Account 3, also known as the Flexible Account, aimed at aiding members during cash flow challenges, especially in emergencies.

Universiti Teknologi Mara (UiTM) Malaysian Academy of SME and Entrepreneurship Development (MASMED) Coordinator (Student Entrepreneurship Centre) Dr Mohamad Idham Md Razak said in terms of drawback, repeated withdrawals from EPF Account 3 could diminish the EPF's effectiveness as a retirement savings instrument.

He emphasised that when someone begins withdrawing from the fund for non-emergency expenses, possibly to cover short-term costs not covered by their current funds, the risk arises that they might face greater financial vulnerability during emergencies when they most need the fund.

Additionally, he added lower contributions would result in smaller retirement savings.

This could lead to financial challenges during retirement, especially given the higher cost of living, potentially fostering a greater emphasis on materialistic values and leaving insufficient funds for retirement living expenses.

“Hence, if the public views EPF Account 3 as an emergency fund and cash it out arbitrarily, the following negative consequences are very likely in order.

“Upon cash out EPF Account 3 loans for short-term expenses, the public might have less money or income to cover emergency expenses at the time the needs arise.

“Upon withdrawals have been made when one does not actually face an emergency, one risks compromising his own financial security in the long run,” Idham said when contacted today.

He stressed that the primary function of Account 3 is to serve as a last resort during emergencies in which domestic emergencies, for instance, includes major health crises not covered by EPF medical benefits.

Idham said global emergencies could involve unemployment caused by industrial policy circumstances, early retirement, or a case where both the job and major medical coverage have been lost.

Meanwhile, he said the move to introduce EPF Account 3 – setting aside 10 per-cent of future mandatory contributions for easier access – has been both hailed as a positive step on the road to becoming more financially empowered and also received with a certain amount of disdain.

He stressed that some interviewees expressed concerns about the initiative, fearing that it might promote careless spending of savings, leading to fewer EPF members adequately preparing for retirement with comprehensive plans.

He provided an example where a younger woman, Alia, aged 28, agreed, expressing that EPF Account 3 could aid in accumulating savings for her age group, particularly before members make significant life purchases, such as a down payment for a house.

“However, there are worries about whether such a measure would be good for retirement savings in the long term since directing some of the money to an easier-to-tap account might reduce the total that builds up for retirement.

“That could be bad news for people who are already having trouble saving enough for old age.

“With sum of money 3, it is easier to make a withdrawal from a part of savings, which might be useful for emergencies or in the short term,” he added.

Therefore, he encouraged the public to engage in voluntary contributions to their accounts for potentially higher returns, albeit with higher risks.

Idham further suggested considering consulting with an advisor to discuss specific circumstances, who could then recommend an appropriate EPF contribution strategy.

He added that for those approaching retirement or with a limited working life ahead, a 10 per cent contribution might be insufficient.

He highlighted making contributions early and regularly allows compound interest to effectively grow one's retirement nest egg over time.

“Consider whether you would like to retire, whether you plan to have all, or part of your living costs funded and if you have other sources of retirement income.

“For retirement, if a particular lifestyle, like a relaxing time in Goa with a morning coffee while watching the sunrise, is important to you, then determine the amount of corpus you will need and ensure you keep contributing accordingly,” he said.

Idham stressed that although the flexibility of EPF Account 3 permits withdrawals during genuine emergencies, it is advantageous for the public to exercise prudence and self-discipline in managing these savings.

Meanwhile, Economist Dr Geoffrey Williams said the initiative brings both positive and negative aspects.

On the negative side, it could lead to inflation, reduce long-term savings in pension accounts, and diminish EPF investments in local businesses.

“This means that at the start a lot of savings can be taken out, similar to what was allowed under the Covid-19 withdrawals.

“This will reduce the savings in the long-term accounts to begin with and make it more difficult to get to the basic savings level,” he said when contacted recently.

However, on the positive side, Williams added it would offset the economic impact of slow global growth and compensate for higher costs of living, especially if subsidies rationalisation causes prices to rise.

He said EPF was trying to restructure its products to allow members greater flexibility and choice when preparing for retirement.

He stressed the Flexible Account aids members in accessing funds while increasing the percentage in the Retirement Account, formerly Account 1, to bolster retirement savings.

Therefore, it represented a positive move that hopefully boosts long-term savings and curtails short-term withdrawals.

Williams also highlighted the primary concern on the initial amount that could be transferred to the Flexible Account, which was 10 per cent of the total savings for those with more than RM3,000, or all of the Account 2 savings up to RM1,000 for those below RM3,000.

He added 10 per cent threshold was enough to be meaningful, however the most positive aspect is that the allocation for Account 1 would increase to 75 percent of contributions, which will be safeguarded.

“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.

“This is due to the dividend on Flexible Account will be the same as the others or 5.5 per cent, as this is better than any other instant access savings account,” he added.

Williams said the option to transfer existing savings into the Flexible Account for immediate use constitutes a significant portion of the EPF fund, which totals over RM1 trillion, making it available as a windfall.

He emphasised this windfall could exceed RM100 billion, but it is estimated to be a maximum of RM50 billion due to various imposed limits.

He stressed that based on previous withdrawal behaviours, EPF estimates that RM20 to 30 billion will be utilised.

Williams added this would have a similar impact on the economy as the Covid-19 withdrawals, but this time it was considered a windfall rather than a necessity.

Hence, he said that there would be an additional RM20-30 billion in consumer spending in 2024, which would contribute to increased growth and inflation.