Personal Relief: Private Retirement Scheme or Deferred Annuity?


prs deferred annuity

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?

 

 

About Richard

Richard Oon Hock Chye has more than 25 years of experience in taxation and business advice, with particular expertise in Malaysian property law. He began his taxation career with Deloitte Touche Tohmatsu, a ‛Big Four’ accounting firm, before starting his own practice, ConsulNet Tax Services Sdn. Bhd., in 1996. He is currently the National Tax Director of TY Teoh International, one of the leading consulting service providers in Malaysia. It is a member of the MSI Global Alliance, a global network of more than 250 independent legal and accounting firms, in over 100 countries. Richard sits on the board of two companies listed on the Main Board of Bursa Malaysia, as an independent non-executive director. He is also a regular contributor to several magazines and publications, and has shared his tax expertise on numerous occasions with organisations and property developers. As well as being a member of the Malaysian Institute of Accountants (MIA), Richard is a fellow member of both the Association of Chartered Certified Accountants (ACCA) and the Chartered Tax Institute of Malaysia (CTIM). He is a Certified Financial Planner (CFP) and holds a tax agent licence issued by the Ministry of Finance. Richard is also the author of the book, ‘Every Property Investor’s Guide To How To Pay Less Tax Legally’.

5 thoughts on “Personal Relief: Private Retirement Scheme or Deferred Annuity?

  1. Both PRS and DA are good option for many self-employed or higher income employee as the plans has two advantages
    1) Tax saving
    2) Enhancing total retirement fund

    Which to choose? Or perhaps taking both….

    • Yes, both schemes has the advantages as highlighted by you. I suppose the choice of schemes is a matter of personal reference. Personally, I’ll still opt for the Deferred Annuity scheme. What do the financial planners think? I’ll be great if they could give some of their opinion here.

  2. The biggest risk a person faces is not loss of capital but rather loss of value of money.

    With the PRS scheme you are given a choice of Conservative, Moderate and Aggressive. The differences are your exposure to equities versus bonds.

    The underlying assumption here is bonds is less risky than equities – something that may over the next 36 months prove to be wrong.

    I advise my clients to pick the Aggressive funds, but with different fund managers every few months.

    This method is a mix of diversification and dollar cost averaging.

    The reasoning is everyone needs to target a return of 10+%. At 10% you double your money every 7+ years.

    Deferred annuity schemes are guaranteed at a rate of 5+%. You double your money every 14+ years.

    The reason why Deferred Annuity Schemes give a “guarantee” of sorts (which is actually not a real guarantee, I think, if you read the fine print) is the insurance companies invest mostly in bonds which pay a fixed return.

    This can backfire. Soon.

    Insurance companies are going to face a big challenge when interest rates rise (as the Federal Reserve reduces QE3′s free flow of money) and will start to face capital losses in their bond exposures.

    Yes, I can see the insurance companies going to the banks for help to relieve them of their capital requirements.

    Going back to the loss of value of money.

    Does anyone really believe the official 2%+ inflation rate?

    I think the “feel it in my wallet” of 5 – 6% inflation rate is the reality

    If you agree with me on the inflation rate, you will realise Deferred Annuity Schemes are simply not good coverage of loss of value of money over the long term.

    So from a pure investment return stand, the PRS scheme if one takes the Aggressive choice, is the best.

  3. There is a tax penalty to withdrawal from annuity scheme too, at least from Etiqa http://www.etiqa.com.my/English/Documents/SRX_Brochure_E.pdf.

    Tax penalty
    8% x Min (Premium eligible for tax relief, Annuity Premium) x
    (Number of premiums paid)
    = 8% x Min (RM3,000, RM5,900) x 5 = 8% x RM3,000 x 5 = RM1,200
    The policyholder will receive RM23,510
    Etiqa will pay IRB RM1,200 from the surrender charge on behalf of
    the policyholder
    The surrender charge imposed during the accumulation period is
    inclusive of the 8% tax penalty.

    • In the recent Budget 2014, it was proposed that a 8% penalty will also be imposed for early withdrawals from a deferred annuity scheme. Looks like Etiqa is prompt to update its brochure as well.

      Thanks for bringing that up, as it gives me an opportunity to update the position on deferred annuity through this comment.

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