Experts advise EPF Account 1 withdrawal only as a last resort

KUALA LUMPUR: Any fund withdrawal from Account 1 of the Employees Provident Fund (EPF) should only be considered as a last resort to ease the public’s financial burden amid the economic impact of the Covid-19 pandemic.

Malaysian Financial Planning Council deputy president, Desmond Chong Kok Fei said allowing contributors to dip into Account 1 provided a short-term relief at the expense of their long-term retirement benefits.

“Account 1 may help with instant cash, but what happens next? People may turn to other resources, seeking personal loans or using their credit cards to support their daily expenses. Both are not advisable due to the high interest rates.

“Besides, allowing it (dip into Account 1) is similar to giving an extension to the loan repayment moratorium. Could all problems be solved?

“If it remains unresolved even after six months, what makes one think they can solve their income problem by withdrawing funds from Account 1?

“Therefore, the government must seek ways to improve or enhance the people’s earnings, such as by creating job opportunities and to offer more subsidy to employers to ensure workers take home a full salary and not endure pay cuts.”

Chong said while the government could offer cash handouts, he questioned its practicality and advised employees, especially those in the B40 and M40 income bracket, to be responsible over their financial situation and plan their expenses.

The first step, he said, was to work out one’s liquidity ratio to determine how long he or she could survive in an event of unemployment or salary cut.

This, he said, could be done with a simple formula — determine the available cash and/or equivalent of cash (such as assets or shares) and divide it by the monthly expense.

“For example, if a person has RM12,000 (existing cash or asset), divide it by RM2,000 (monthly expense). This means he can sustain for another six months.”

Chong said should the Account 1 withdrawal be permitted, employees must use the liquidity ratio to determine the amount needed, depending on their personal financial situation.

“It is the people’s money, so they must ask themselves if they truly need it because if they have excess cash, they will spend them all.

“Hence, not everyone should be allowed to dip into their EPF corpus, which could leave long-term ramifications to the country due to insufficient savings when these EPF contributors retire.”

He advised those in a critical situation to apply for the targeted moratorium, visit their banks for rescheduling and restructuring of a financing, or seek help at the Credit Counselling and Management Agency.

Meanwhile, lawyer Fredric Kong Yat Sen said the Employees Provident Fund Act 1991 preamble clearly stated that it was “an act to provide for the law relating to a scheme of savings for employees’ retirement and the management of the savings for the retirement purposes and for matters incidental thereto”.

“As it is, various amendments were made to the original act to allow for different sorts of withdrawals that arguably have nothing to do with ‘savings’ and ‘retirement purposes’ and this has diluted the raison d’être (reason or justification for existence) of the scheme.”

Therefore, Kong said, a further erosion of this and the allowance for Account 1 to be withdrawn to meet members’ immediate or near future needs would turn the EPF into nothing more than another bank or financial institution.

He said for an entity like the EPF to generate dividends for members, it needed capital that mainly came from contributions, which were then invested to gain more money for contributors.

“Imagine if everyone is allowed to withdraw from the EPF a substantial amount of their contributions.

“This means that year after year the EPF loses more and more capital and therefore cannot generate the amount of income and dividends that it has been able to over the years.

“So who stands to lose in the end? It is the employees who, once they retire, will find that they have nothing left.”

Kong also explained that if the government permitted Account 1 withdrawal, it did not have to be tabled in Parliament.

“Wherein Section 54(7) makes clear that the Minister who is responsible for matters relating to the EPF may, if he thinks it expedient and after consulting with the EPF board, add to, vary or modify the purposes for which a member may make a withdrawal from the Fund by way of a gazetted order.

“Therefore there is no need to amend any law.”

Source: NST