EPF: 11% or 8%?

It has been almost a week since the government announced the reduction of EPF employee contribution from 11% to 8%. Many might be confused of what to do next. Should they accept the new contribution rate of 8% or maintain at 11%. There have many people debating of what to do. Some are pro towards maintaining at 11% and some pro towards accepting 8%. What is my stand? It depends. Let me help to guide you on deciding, whether to choose 8% or 11%.

EPF (Employee Provident Fund) or KWSP (Kumpulan Wang Simpanan Pekerja) in Malay was created to help workers to save and provide a retirement fund once they retire. It is a useful thing for many as this could be their only savings they would have for their entire life. There’s two part contribution. The employee part of contribution of 11% is sliced out from your monthly salary. While the employer part of contribution of 12% is given on top of your salary.

Starting from January 2009 until December 2010, your portion of contribution will become 8%. But, you do have an option to maintain at 11% by filling up the Form KWSP 17A (AHL). What you should do?

Accept the 8% contribution only if you,

1. Are having high interest debts such as credit card debts. My advice is to accept the 8% contribution. Use the additional 3% to pay off your bills as soon as possible. Why? The credit interest can be up to 18% per annum which is significantly higher than your EPF average return rates of 4% - 5%. Check out my posting ‘Thinking in Percentage’ to understand why.

2. Have found an investment opportunity which offers a better return than your EPF returns. Make sure you only use the money to invest for long term and not to spend away for unnecessary expenditures.

Maintain at 11% contribution if you,

1. Don’t have any high interest debts.
2. Have no proper saving plan so that you would have something when you retire.
3. Are the types who can’t control your expenses and only knows how to spend away every single cents.
4. Don’t have any other investment opportunity which offer better rates to invest or low risk taker.

So, the choice is yours, to follow my advice or ignore it and continue your extraordinary spending.

“How about if I’m at a very tight budget and need some extra cash to support my family? That extra 3% could help us out.”, someone trying to get pity by telling their hardship. You must understand how important your savings is for future. So, you have to live your life according to your income and not according to your desire. Those who are really living in poverty is acceptable to go with 8%, but not those who are earning enough but refusing to accept the truth of life.

All and all, there are advantages of both 8% and 11% contribution depending on which criteria you are in. All the best in making your decision.