The Employee Provident Fund, EPF was established by the government of Malaysia to provide the so-called retirement funds and benefits to the employees, who are members of the EPF. EPF is also the other name for KWSP, or Kumpulan Wang Simpanan Pekerja.
The term and name EPF is not exclusively used in Malaysia as other countries like India and Sri Lanka also use the same. Similar scheme is called Central Provident (CPF) Fund in Singapore while Hong Kong uses Mandatory Provident Fund (MPF).
EPF members are made up of the private and non-pensionable public sector employees. It is important to note that it is compulsory for the employers to make statutory EPF contribution for their employees. With that being said, if you notice your monthly pay slip comes without details of EPF contribution, your employer has broken the law by ignoring your contribution and once you report this to the authority, the court will rip them apart.
An employee who is entitled for a pension scheme will enjoy a monthly ‘income’ which is made up by some fraction of the monthly salary until his or her death (which then will be enjoyed by the beneficiaries). On the other hand, a member of EPF will get the sum of their contribution once he or she reaches 50 and 55 (optional), progressively. Depending on the salary scale, the final amount of your EPF contribution account can reach a few thousands, hundred thousands or even millions for those earning high salaries. We are talking about the C-level positions (CEO, COO, CFO and such) for reputable companies here. The first entitlement withdrawal when you reach 50 years old is 30%.
However, EPF fund is not merely designed for retirement but also covers sickness and disabilities. You can also withdraw some amount from your EPF account to make down payments for houses, education, medical expenses and investments. If you want to know more about the benefits of EPF fund and how withdrawing of EPF works, talk to your employer.
Through the EPF fund, a fraction of the employee’s monthly income is deducted and channeled into their EPF account on monthly basis. Additionally, the employer is also regulated to contribute a certain percentage which is according to the employee’s gross salary. In other words, think of your EPF fund account as a saving account, which will be given back to you once you have reached a certain age. If by then you have stopped working and no longer generate income, your EPF account will be your only savior.
In addition, EPF also acts as your trusted fund manager and invests in certain business activities which enable your account to generate yearly dividends and grow your account. For the record, between 2000 to 2007, EPF gave an average dividends of 5%. The highest dividend pay outs so far was 8.5% which were given between the year 1983 to 1987.
Currently, the mandatory EPF contribution is 11% from the employee’s monthly salary while the employer must contribute a minimum of 12%. In total, you will have 23% contribution to your account monthly. Currently, there is a proposal being studied to reduce percentage of the monthly contribution for older folks. Many groups however, are disagreeable to this proposal.
To illustrate the EPF contribution mechanism, let’s say your monthly salary is RM1500. An 11% reduction means RM165 will be deducted and channeled into your EPF account every month, leaving you RM1335 in your income. On top of that, the employer will also contribute RM180 (12%). Your total monthly contribution, hence becomes RM345. In a year, you will have RM4140 contribution. As your income increases, so will your EPF contribution. And we have not taken account the dividends, which depends on the EPF’s investment returns and financial performance.
A number of employers in Malaysia also offer higher percentage than 12%, as part of the effort to generate interest from the prospective employees as well as part of the benefits in their retention scheme (For obvious reason you will be more captivated by an employer who offers additional EPF contribution). Sometimes, the employer’s contribution can be as high as 18%.