Introduction second life stage in retirement planning of the

Introduction

Retirement plan is the plan in which the employer
agreed a specified pension payment on retirement that is
predetermined by the plan that have promised to employees based on their
earnings history, tenure of service and age; Retirement plan also as a financial
schedule that designed to replace employment income upon retirement. The
retirement plans may offer by employers, insurance companies, trade
unions, the government, or other institutions. In general, retirement planning
is the plan that prepared for life after retire, and the benefits will not just
financially but in all aspects of life. The financial benefits for applying
retirement plan are the retirement plan is a long-term savings and investment
plan for employees that prepared for the days after they have retired therefore
the employees can receive a specific amount of payment or profit from the
investment and saving that they have joined in the retirement plan when they
retire. For the
non-financial benefits, there are include of the employee lifestyle when they
have been retired like how the employee spend their time and the condition of
health of the employee. There are different stages of retirement planning
changes according to different life stages of the employee. The first stage is
the early of an individual’s working life which the employee just begins their
career, the retirement planning has to begin and plan for their retirement in
the future. For the second life stage in retirement planning of the employee is
during the middle employee career, it includes setting a specific amount or
targets and put into the retirement plan such as putting more amount of money
or salary into the Employees Provident Fund (EPF) account so can help in
achieve the target that fix for the retirement in future. The last life stage
in the retirement planning is during the employee reach for their retirement
age. In this stage, the contribution and the benefit will provide to the
employee and if the employee dies before the retirement age as stated in the
plan then the contribution and benefit will be given to the heirs or
beneficiary. Therefore, in this stage the planner will call as the distribution
phase.

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There is some authority that will provide the
retirement plan to employees so that this the right for the employees can be
protected and guarantee the life after the employees have been retired. For the
government officer in Malaysia there are Government pension plan that given to
the public servant which provide by the Jabatan Perkhidmatan Awam (JPA)
Malaysia. For other employees which work for private sector, there are Employee
Provident Fund (EPF) Malaysia which provided to the employee. Based on the Employees
Provident Fund Act 1991, EPF is the national compulsory saving scheme for employees
or individual employed in the Malaysia private sector. The retirement program
is fully funded and provides defined contribution type benefits to members and
the scheme will be discussed on the type of retirement plan later.

Minimum
Coverage Requirement

An efficient retirement plan must can benefit the
employees such as high compensated employees. Therefore, there are some minimum
coverage requirement that been set up to protect the employees. Besides this,
there are some test that need to carried out to minimize the discriminations in
favor of the highly compensated employees in the organization. The test is
including ratio percentages test and average benefits test.

a)     
Ratio Percentage Test

The ratio percentage test must benefit a non-highly
compensated employees with at least 70% of the highly compensated employees
that covered in the plan. In other word, if the plan covers 100% of the highly
compensated employees in the organization, it must cover 70% of the non-highly
compensated employees in company. For example, if the plan covers only 50% of
the highly compensated employees, so it must cover at least 35% (50% x 70%) of
the non-highly compensated employees.

b)    
Average Benefits Test

For average benefit test, the retirement plan must
benefit a reasonable classification of employees in the organization and the
test must not discriminate of the highly compensated employees only. Next, the
average benefit in the average benefits test for the non-highly compensated
employees in the organization must be at least 70% of the average benefit that provided
to all highly compensated employees.

Minimum
Age Requirement

There is a minimum age for the employee to enter the
retirement plan that offer by the government, insurance company or other firms
that offering the retirement plan such as all employees who have want to join
into the retirement plan must have reach the age of 18 years such as EPF. However,
the minimum age and service requirement is based on the rules or policy that
set by the company or authority that offering the retirement plan to the
employee in the organization.

Retirement Ages

There are 3 retirement age in typical pension plan

·        
Normal retirement
age

·        
Early retirement
age

·        
Deferred
retirement age

i.           
Normal Retirement Age

The
normal retirement age is the normal retirement age of employees and the
employees can receive pension benefit without any deduction. According to the
Minimum Retirement Age Act 2012 Malaysia, the minimum retirement age of
employees is at 60 years old and this act has been enforced in 1 July 2013. The
employees cannot be forced to retire.

ii.           
Early Retirement Age

The
early retirement age is the age before the normal retirement age of employees
can retire. The employees who retire in the early retirement age, the
retirement benefit will be reduced. For example, in defined benefit plan, the
employees who are retirement early will reduce the retirement benefit of the
employees. This is because, the employee’s full benefit cannot be accrued by
early retirement date, the retirement benefit is paid over a longer term, and
the early retirement benefits are paid to the employee who have died before the
normal retirement age.

iii.           
Deferred Retirement Age

The deferred
retirement age is the age after the normal retirement age of employees can
retire. There are some older employees remain the work although they have reach
the normal retirement age at 60 years old. Therefore, the employees who remain
to work will continue collect the retirement benefit.

Vesting Provision

Vesting mean the employee’s right to employer’s
contributions or benefits attributable to the contributions if employment
terminates before the retirement. The employees have capable to their
contributions as the employment have been terminates before their retirement.
However, the right to employer’s contributions is depend on the vesting that
have been agree.

The basic objective of vesting in the perspective of
employers is to decrease the labor turnover in the company. This is because the
employees who have extra incentive they will remain or stay in the company
until the vested status has been attained. For example, once the employees
terminate their employment before full vesting, then the forfeitures will be use
to decrease the employer’s future pension contribution. While in other hand for
some retirement plan, the forfeitures can reallocate to the accounts of the
participants or used to decrease the future employer contributions.

Advantages
of Retirement Plans

Every plan that offer by the government, employer and
other insurance company have their own advantages to the participant, customer
or employees. Therefore, there are some advantages of retirement plan that
offer to the employees.

First, the retirement plan can provide a better return
on employee retirement investment. This is because the investment in retirement
plan is more guarantees than other personal plan that offer by the insurance
company because some of the retirement plan such as EPF that provide in
Malaysia, the employees and the employer are contribution in the account as
saving for the future and there is interest that added into the account too as
investment. Therefore, the retirement plan such as EPF can provide a better or
more guarantee return to employee.
Besides that, like the group health plans, the group retirement plans that
offer to the employees by the employer of the organization may also provide a
better return to employees in the retirement plan than employee that might get the
retirement plan individually. This is because of the size of the employee.

Next, the retirement plan that offer to the employees
may offers many options for employees to diversify their retirement accounts.
In retirement plan, the insurance company may offer many option of retirement
plan to employees and let employee choose. Whether the employee can likely put
some money into options with a modest but low-risk return or invest the mutual
funds that have a higher risk but might yield a high return.

Besides that, the retirement plan also can encourages saving
by deducting the payment or salary of the employee automatically into the retirement plan’s account. For
example, the Employee Provident Fund (EPF) Malaysia, the employee will
automatically deduct a specific amount from their salary and the salary will
contribute in the EPF account of the employee. Therefore, this will encourage
the employee saving the money automatically and the money will get by the
employee once they have reached the retirement age so this can make sure or
guarantee the employee daily life activity once he or she have been retiring.

Disadvantages of
Retirement Plans

However, there are some disadvantages of the
retirement plans. Not all the retirement plans that provided or offered by
employer in the organization to employee can be transferable Some of the
retirement plans that offer by the employer to employee such as traditional
pension plans cannot be transferable. For example, once the employees resign
the jobs in the organizations and the employee’s retirement is offer by the
employer, the organization retirement plan and the benefit will stop and the
retirement benefit will be stay with the employer. 

Next, employee that changing jobs often may result in
having no or few retirement funds if we have no other retirement options. Not
as EPF the benefit of the employee still available although he or she have been
resigning from the jobs, some of the benefit of the retirement plans that offer
by the employer or the insurance company will not give to the employee once he
or she resign from the organization unless there are specific vesting under the
contract of the retirement plan.  Besides
that, the employee may will not receive any of the contribution that have been made
by the employer if the employee resigns the jobs from the organization before a
specific number of years that have been agreed in the retirement plan.
Therefore, the employee has to choose wisely before agreed the retirement plan.

Type
of Retirement Plans

a)     
Employees Provident Fund (EPF)

The Employee Provident Fund (EPF) is formed under the
Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which is
providing the retirement benefits to the employee under the scheme so that the
saving of the employee can be manage efficient, effective and in a reliable
manner so the daily life of the employees can be guarantee. Employee that been
mentioned above mean that an individual that have been employed by an employer
under a contract of service. Besides that, EPF also provides some framework or
rules for employers which is EPF Act (Act 452) so that the employer can carry
out their statutory and moral duty to their employee who provide service to
them and this can also ensure, protect or guarantee there are enough fund upon
the retirement of the employee. The vision of EPF is to help the members of EPF
achieve a better future while the mission is to safeguard the members’ savings
and deliver excellent services. The requirement to become a member of EPF are
at least 18 years old, Malaysia citizen and every employer is compulsory to
register their employee as an EPF member.

A specific amount of contribution will be credit into
employee’ individual accounts in the EPF and the amount will be deducted or
credited based on the monthly salary of the employee. The current contribution
rate for employees that will be credit is for those who receive salary RM5,000
or below, the employee’s contribution is 8% to 11% of their monthly salary
while the employer contributes will be 13%. While for the employees who receive
salary who more than RM5,000 and above the employee’s contribution of 11%
remains, but the employer’s contribution will be12% only.

The contributions of the employees will invest to the approved
financial instruments so that the income can be generated such as Malaysian
Government Securities, Money Market Instruments, Loans & Bonds, Equity and
Property. The dividend that guarantees by EPF to the employee or the member of
EPF is minimum of 2.5 % annually. However, the dividend rate is subject to the
returns from investments that have been made in the approved instruments.

There are some advantages that will be giving to the
employee under EPF. The contribution that have been made can be withdrawn once
the employees retire, this mean that the employee will get savings that been
contribute by the employee’s and employer’s plus the yearly dividends. For
example, when the employees contribute 8% of the monthly salary to the EPF and
the employer will contribute another 12% or 13% of your salary to your EPF
savings. Therefore, once the employee retires he or she will get a big amount
of saving and this will help to ensure there are enough fund for the activity
once he or she is retiring.

Besides that, the dividend of Simpanan Shariah account
is approved and based on the actual performance from the shariah-compliant
investments. Next, there are also incapacitation and death benefits that will provide
by the EPF investment earning, so this can help to reduce the financial burden of
the family when the employee is face the incapacitation or the event of death.

Furthermore, there are tax exemption when contribute
under EPF. There are tax relief of maximum amount of RM6,000.00 when contribute
in EPF. The employee will be excluded from paying the income tax under the EPF
savings withdrawal schemes and the returns on the EPF investment.

Last but not least, there are a 2 type of withdrawals
of the contribution of the employee in EPF such as normal retirement withdrawal
and pre-retirement withdrawal. There is age 50 years’ withdrawal, age 55 years’
withdrawal and age 60 years’ withdrawal which is  the normal retirement withdrawal; While the withdrawal
to reduce or redeem or paying for housing installment or loan, incapacitation withdrawal,
leaving country withdrawal, education withdrawal, pensionable employees
withdrawal and optional retirement withdrawal, members’ investment scheme, withdrawal
to buy or build house, withdrawal of savings that more than RM1 million in
account, death withdrawal, health withdrawal, hajj withdrawal, flexible housing
withdrawal, and PR1MA housing withdrawal which are the pre-retirement
withdrawal.

b)    
Private Retirement Scheme (PRS)

Private Retirement Schemes (PRS) is a long-term investment
and savings scheme which is voluntary by the
participant or an employee. PRS is prepared for the individual whether he or
she is employed, self-employed or employer, Malaysians
or non-Malaysians. Besides that, this scheme is to help the individual to save and
enhance the variety of the retirement planning in Malaysia. So that, they can accumulate
their saving for they retire. PRS will offers some retirement fund to the
individual, so the individuals can choose from the option that provide by the
agent or the insurance company and invest in the plan that agree or accept by
the individual based on their retirement needs, objectives and risk appetite. The
objectives of Private Retirement Scheme (PRS) is almost same as the objective
of the Employee Provident Funds (EPF) which is to enhance the living standards
for the individual at retirement from the additional savings. Next, the PRS is
an affordable savings for the individual, this is because the minimum
contribution of the PRS is 10% monthly salary of the individual so that the retirement
savings can be increase.

There is some requirement that an individual need to
achieve so that he or she can join in PRS. The individual need to reach the age
of 18 years and unlike EPF the PRS are offering to the Malaysians and
non-Malaysians as well. Beside this, the individual need to fulfill the minimum
contribution which are RM1000 that been set or fix for the individual according
to the plan that have agreed by the provider.

The contributions to the fund under PRS will be separated
into 2 separate sub-accounts which is Account A and Account B. There are 70% in
Account A and 30% will contribution in Account B. Account A can be withdrawn
when reaching retirement age while Account B can be pre-retirement withdrawal but the sum of the withdrawal
will be charge for 8% of tax penalty. Under PRS the individual can join to
contribute more than one PRS fund or scheme with different providers.

In addition, under the Private Retirement Scheme
(PRS), an individual will be having the tax relief on the contribution in the
fund or scheme. According to Budget 2012, an individual can enjoy a tax relief
up to RM3,000 per year and the individual tax relief that can be having applicable
on gross contribution. While for the Malaysians who aged between 20-30 years
old, they will get RM1,000 incentives into their PRS account, however this
incentive will only give one time and for each individual only. There are also
19% of tax deduction on the participant’s remuneration will be having by an
individual when he or she join in PRS.

Next, under PRS, the individual can change or transfer
their funds to another provider. This is because the fund or scheme that join
by the individual is to ensure their objectives
for retirement and investment can be aligned and realized. Therefore, to
protect the benefits of the individual the fund under PRS can be changes or
transferable. However, the fund that want to change or transfer to must under
the PRS fund with the same provider and align with the rules and regulation
under the plan.

There is various way that the fund that invested by an
individual can be withdrawal. The investment can be withdrawal when an
individual has arrived for his or her retirement age which have been stated in
the policy or document of the fund, the death of the participant, the
participant that suffered from permanent total disablement, serious disease or
mental disability, or other situation that have been stated in the policy that
offered by provider of the fund to the participant.

Last but not least, there are only 8 company which approved
by the Securities Commission Malaysia as the Provider of the Private Retirement
Scheme. The 8 company include, Affin Hwang Asset Management Berhad, AIA Pension
and Asset Management Sdn. Bhd., AmFunds Management Berhad, Kenanga Investors
Berhad, Manulife Asset Management Services Berhad, Public Mutual Berhad, RHB
Asset Management Sdn. Bhd., and CIMB-Principal. Therefore, the individual who
want to join the Private Retirement Scheme must be choose the company that approved
by the Securities Commission Malaysia as the Provider of the Private Retirement
Scheme, so that, the benefit of the participant can be protected because the
Securities Commission Malaysia permitted the company to offered the fund to the
participant. 

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