Lower EPF contribution from 11% to 8% for 2 years from Jan 2009

Following an announcement made by Deputy Prime Minister and Finance Minister YAB Datuk Seri Najib Tun Abdul Razak during the winding up speech for the Ministry of Finance on the 2009 Budget on Tuesday 4 November 2008, the Employees Provident Fund (EPF, a.k.a. Kumpulan Wang Simpanan Pekerja, KWSP) has now made an official statement on the execution of this decision.

The reduction of the employees’ contribution to EPF from 11 % down to 8 % will be made automatically, effective from January 2009 until December 2010 wage. The employers' 12% contribution remains the same.

This means that if you don't explicitly inform EPF to maintain your 11% contribution as before, by January 2009 onwards, your contribution will be automatically reduced to 8% for the next 2 years. If you intend to maintain your 11% contribution, or any portion other than 8%, you have to inform your employer, as well as submit the "Form KWSP 17A (AHL) - Khas" to EPF office.

As at 31 December 2007, the total membership of EPF stood at 11.69 million. A total contributions amounting to RM28.93 billion were made during year 2007. Assuming the figure does not change too much in 2009 and 2010, a 3% reduction will mean (RM28.93 billion/23% x 3% x 2 years) = RM7.55 billion to be freed up for spending in the economy, in the optimistic case that all EPF contributors opt for the rate cut and don't maintain the 11% contribution rate by submitting the "Form KWSP 17A (AHL) - Khas".

This is not a high figure to stimulate the national economy, but it does facilitate a similar effect of lowering the bank interest rate, which is happening in many other nations right now. This also hints that the Malaysian government is trying hard to avoid an interest rate cut, which would probably further weakening the forex exchange rate of Malaysian Ringgit.

As an employee, this change in contribution rate means that if your monthly salary is RM2k, you will have an additional RM60 monthly disposible income; if your monthly salary is RM5k, then your figure will be RM150; and if your monthly salary is RM10k, it will be RM300.

Should you opt for the lower contribution rate, or should you submit the "Form KWSP 17A (AHL) - Khas" and maintain your normal 11% contributions? One thing to consider is that since the economic climate is not so favourable this year, we won't expect a good dividend payout by EPF to be announced.

I would say that it is not a bad idea to reduce your EPF contributions, and spend your money wisely to make more value from it. For example, you can use it for personal development (education, books, workshops, ...), investments, insurance, etc. just to name a few. However, if you think that you are not a wise person in money spending, you might want to opt for maintaining your 11% contributions to EPF as a form of "force saving".

What do you think?

Click here to download the "Form KWSP 17A (AHL) - Khas" for individual employee.

Click here to download the "Form KWSP 17AA (AHL) Khas" for employers who wish to apply on behalf of more than two employees.