As you are probably aware, with effect from the Year of Assessments 2012 to 2021 (10 year-period only), individual taxpayers are eligible to claim a personal relief of up to RM3,000 annually, for contributions to the Private Retirement Scheme (PRS) or the deferred annuity scheme.
Further to the post on Contribute to the Private Retirement Scheme to Reduce Your Tax Bill, I have been often asked, “What is your personal preference, ie. PRS or deferred annuity?” Well, it depends on individual preferences. But let me just highlight from my understanding, the key differences of the two investment products. Bear in mind that although I have the Certified Financial Planner (CFP) credentials, I am not a practicing CFP so I would urge you to consult your own financial planner before taking action on any of the opinion given.
From the tax relief perspective, both investment products accord the taxpayer the same kind of personal relief of RM3,000 per annum for a period of 10 years, ie. from 2012 to 2021. Which means that for those of you who have not contributed to either one of these products in 2012 and are just thinking of so in 2013, you have only 9 years left to enjoy the tax personal relief.
The PRS is offered by Unit Trust Companies and governed by the Securities Commission of Malaysia, while the deferred annuity scheme is offered by Insurance Companies and governed by Bank Negara Malaysia.
With the PRS, you are not committed to contribute a fixed sum of money to the fund annually, ie. which means that you have greater flexibility in determining how much you want to contribute to the fund, if you are the type who are not overly concerned about the personal relief for tax purposes. While in the case of the deferred annuity scheme, you would have committed yourself to contribute a fixed amount (say, RM3,000) for the next 10 years.
One important difference is that with the PRS, your capital (ie. the money which you have invested) is NOT GUARANTEED and is dependent on market forces and fluctuations, especially so if you were to place your investments in the equity funds portfolio. On the other hand, the deferred annuity scheme offers the investor a fixed annual return on his investments upon his retirement, ie. the returns are GUARANTEED.
Another point to note is that where withdrawal of contributions from a PRS by an individual is made before the age of 55, the withdrawal will be taxed at a rate of 8%. The PRS provider is required to withhold and remit the tax to the Malaysian Inland Revenue Board. The deferred annuity scheme is NOT subject to this condition.
From my understanding as well, upon a person’s death, monies in the PRS account will be subject to the usual estate distribution conditions, ie. the immediate family member will need to apply for a Grant of Probate of Letter of Administration to unlock the deceased’s estate for distribution to the beneficiaries, which will take some time to do so. In the case of the deferred annuity, as this is an insurance product, passing on the benefits of the policy to the next of kin is easily effected through a proper nomination and the proceeds are released with relative ease.
So which investment product is my personal preference? For me, it will be the DEFERRED ANNUITY SCHEME. You have to bear in mind the objective of the PRS/deferred annuity scheme is to supplement one’s income upon retirement and so with the deferred annuity, I am assured of FIXED annual returns upon my retirement as the returns are guaranteed and unlike the PRS, I do not have to worry about fluctuations in my investment value when I retire.
Again, this is MY PERSONAL PREFERENCE. Others may have their own individual preference. Which is it for you?