What exactly is the EPF “flexible” Account 3, and how does it affect your retirement plans? Here is what we know so far…
EPF Account 3 To Be Implemented In April 2024
When Prime Minister Anwar Ibrahim tabled the 2024 Budget on 13 October 2023, he also announced that the government will introduce a flexible EPF account, which would allow people to withdraw their retirement savings immediately.
On 21 November 2023, the Deputy Finance Minister I, Datuk Seri Ahmad Maslan, announced that the “flexible” EPF Account 3 will be implemented in April 2024:
EPF will announce its dividend in February 2024, and the Finance Ministry will then announce a detailed plan on the flexible account. The third account will be implemented starting from April next year.
EPF Chief Executive Officer Datuk Seri Amir Hamzazh Azizan said that it is fine-tuning details of the “flexible” third account:
We are looking at all possibilities, whether it (withdrawals) is free for all or whether it should be guided.
The concept at the moment is to have a flexible account because we have learned during Covid that sometimes there would be circumstances that make it difficult to go from day to day.
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EPF “Flexible” Account 3 : What We Know So Far!
Here is what we know so far about the EPF “flexible” third account, or Account 3:
EPF Account 1 Won’t Be Affected
Currently, EPF contributions are divided into two accounts:
- Account 1 : 70% of monthly contribution
- Account 2 : 30% of monthly contribution
EPF chief strategy officer, Nurhisham Hussein, said in July 2023 that the percentage of contribution for the proposed “flexible” Account 3 has yet to be determined, but would be about 5% to 10% of the monthly contribution.
He also said that Account 1 would remain with its 70% contribution, and that contribution to Account 2 would be reduced instead, to fund Account 3. When implemented, the ratio would look something like this:
- Account 1 : 70% of monthly contribution
- Account 2 : 20% to 25% of monthly contribution
- Account 3 : 5% to 10% of month contribution
EPF Account 3 Will Apply To All
When introduced, Account 3 will apply to all EPF contributors. This was confirmed by Deputy Finance Minister I, Datuk Seri Ahmad Maslan, on 24 October 2023.
It can be accessed by all members, be they from the B40, M40 or T20 groups.
EPF Account 3 Will Have Lower Dividend
While there was speculation that the flexible Account 3 would have no dividend, EPF chief strategy officer Nurhisham Hussein, dispelled that notion on 11 July 2023.
However, the proposed EPF Account 3 is expected to have a lower dividend rate when implemented. The lower dividend rate has not been revealed.
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You Can Transfer To Account 1/2
The lower dividend rate for Account 3 will be a real concern for contributors who want to save for their retirement, and do not plan to withdraw their savings early.
Even a small reduction in the dividend rate will make a big difference, because of the snowball effect of compound interest over time.
Fortunately, Nurhisham said that members will have the option to transfer their Account 3 savings into Account 1 or Account 2, if they prefer to avoid the lower dividend rate.
Hopefully, this can be implemented with a single opt-in registration, and would not require the money to be transferred on a monthly basis.
EPF Account 3 Will Offer Immediate Withdrawals
In the past, contributors can request to withdraw from their Account 2 to fund certain large purchases:
- To pay for education
- To purchase or build a house
- To pay for a housing loan
- To cover medical expenses
Unlike Account 2, the proposed “flexible” third account will function like a savings account, and allow contributors to withdraw, as and when they wish.
EPF Accounts To Be Renamed
When EPF introduces Account 3, it will also introduce new names for the three accounts, to better reflect their purposes:
- Account 1 : Retirement Account
- Account 2 : Value-Added Account
- Account 3 : Flexible Account
The renaming will help people better understand the use and purpose of each account.
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EPF “Flexible” Third Account : Is It Useful?
Personally, I feel that the EPF “flexible” Account 3 is like swatting an elephant with a lidi stick.
EPF contribution amounts to 23% to 24% of your monthly salary. Even if Account 3 receives 10% of that contribution, that amounts of just 2.3% to 2.4% of your monthly salary.
Account 3 is targeted at the informal sector workers, many whom earn minimum wage or close to it. Let’s say you earn RM3,000 a month – TWICE the minimum wage of RM1,500.
- Your Account 3 will only receive RM72 a month.
- After 1 year, your Account 3 will only have RM864.
As you can see – that is not a lot of money, even for people who earn twice the minimum wage. Yes, it is better than borrowing money from loansharks, but the small percentage that funds Account 3 means you don’t really have much to work with.
On top of that, you are actually “losing” money even if you don’t actually withdraw any money. Parking all the money in Account 3 will garner lower dividends. It may be small, but the difference snowballs over time because of compound interest.
As it is, EPF announced in mid-November 2023, that some 48% of its contributors – 6.3 million people – have less than RM10,000 in their accounts!
If you can afford it, you should transfer all money stored in the “flexible” third account, to Account 1 or Account 2, when this scheme is implemented.
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