Best Retirement Plan For Self Employed Person – Pension schemes for the self-employed Self-employed people can benefit from the flexibility of PRS to choose how often and how much they want to save.
The majority of Malaysia’s workforce is self-employed or in the gig economy, so what are their retirement plans? Many of them are attracted by the flexibility in choosing projects to implement, the opportunity to gain diverse professional experience and the autonomy in setting their own working hours, many people are attracted to entrepreneurship to realize their dreams and chart their own path.
Best Retirement Plan For Self Employed Person
With a total population of 15.54 million, the World Bank estimates that more than a quarter – about four million – are self-employed, according to the latest data from the Malaysian Ministry of Statistics. From financial planners and small business owners to online marketers and email drivers, the nature of work for self-employed people is diverse and multi-faceted.
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In line with global trends, reports indicate that it is also increasingly the preferred employment choice among Malaysian millennials and Generation Z – those born since the mid-1990s. While this development is exciting, self-employed Malaysians often neglect something everyone should do when starting out: saving for retirement.
As a freelancer, independent contractor or techno-entrepreneur, you don’t enjoy the usual benefits of contract work. Income typically varies from month to month and there are no pensions or mandatory programs to provide a financial safety net.
It can be tempting, even necessary, to use excess cash for growth or to cover operating costs. The risk of not saving enough for retirement is high.
This state of affairs is confirmed by a survey conducted by Private Pension Administrator Malaysia (PPA), the central administrator of private pension schemes (PRS), where 62.8% of self-employed people said they would like to save more for retirement. Unless you expect to make significant gains or a generous inheritance, it’s important that you start saving actively for retirement.
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“When you’re busy growing your business or working on multiple projects at once, don’t make the mistake of not saving for retirement at all,” says Husaini Hussin, CEO of PPA.
“Create a retirement plan based on your needs, goals and risk tolerance, then stick to it by automating your savings.”
Having a retirement plan is essential for a self-employed person to be successful. It can mean the difference between working until you’re old and relaxing on the beach.
PRS, a voluntary long-term savings and investment scheme designed to help you save more for retirement, allows you to contribute at your own pace and within your own means.
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“Think of your retirement savings in terms of a percentage rather than a fixed amount, or only save what’s left at the end of the month,” Husaini advises.
“This will keep you from overextending yourself during a lean month and save you a little more when things go well.”
To have enough replacement income to maintain your standard of living in retirement, PPA research suggests you save one-third of your income each month. If you save a certain percentage of your income this way each month, market volatility works in your favor because you win more units when prices are low.
“PRS’s best-performing funds have delivered strong returns for PRS members from inception to October 31, 2019.” (See table)
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Another aspect of PRS is the Nomination feature, which replaces all wills. Apart from the compulsory scheme, PRS is the only savings scheme in Malaysia with a feature to ensure that your loved ones or nominees receive the gift without any hassle in the event of your untimely death.
More recently, the 2020 Budget proposed that PRS members could take early retirement for health care and housing without any tax penalties. Additionally, no tax penalties are allowed for medical expenses incurred by immediate family members due to rising health care costs.
“The introduction of a 0% tax penalty on PRS early retirement withdrawals from Sub Account B, which holds 30% of health and housing savings, reflects the government’s understanding and commitment to helping all Malaysians get some of their living savings. retirement savings for their needs,” Husaini said. “This proposal will take effect next year.”
In addition, PRS members who have reached the retirement age of 55 or suffer from permanent total disability, serious illness or mental impairment can withdraw the full amount of their PRS savings without any tax penalties.
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You can start saving in a few simple steps by using PRS Online Enrollment, a service developed by PPA that provides an easy, convenient and secure way to save for retirement. All you need to do is deposit RM100 for your first deposit and the minimum amount for subsequent top-ups is only RM50.
There are 55 PRS conventional and Shariah funds to choose from from eight PRS providers, but if you can’t decide, choose the default age-based option. A unique feature of PRS is that it automatically adjusts the appropriate asset allocation to your age group.
“The beauty of PRS is the choice and flexibility PRS members have to subscribe to or top up multiple PRS funds anytime, anywhere, using just one PRS account,” says Husaini.
“Track your savings and monitor your investments using the myPPA mobile app. You always have the option to optimize your profits by switching PRS funds within the same PRS provider or transferring your savings to a different PRS provider.
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What’s more, PRS contributions also qualify for personal tax relief of up to RM3,000 per year, providing tax savings that can further boost your retirement savings. With selected PRS suppliers, you can enjoy zero sales charges or free insurance or takaful with cover up to RM100,000.
Self-employment can be exciting, scary and rewarding all at the same time, but without a mandatory program requiring savings and employer contributions, the responsibility for building your retirement savings falls solely on you.
Your money starts working for you as soon as you save it for retirement. Whether you’re an entrepreneur, photographer or email driver, enjoy the flexibility to choose the frequency and amount you want to save with PRS.
© 2023 Smart Investor Malaysia | The content contained on this website is for educational purposes only. You should always seek professional advice from an appropriate financial advisor or institution. A Simplified Employee Pension (SEP) is an individual retirement account (IRA) that can be set up by an employer or self-employed person. The employer receives a tax deduction for SEP IRA contributions and makes contributions to each eligible employee’s account on a discretionary basis.
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Additionally, under the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which went into effect on December 20, 2019, small employers will receive a tax credit to offset the costs of starting a 401(k) or SIMPLE IRA plan with automatic enrollment compensation. This is on top of the startup loan they already receive.
SEP IRAs often have higher annual contribution limits than standard IRAs. In some ways, they are a cross between a traditional IRA and a 401(k) fund. As with the latter, they may receive employer contributions. These employer contributions are credited immediately.
The ASEP IRA is an attractive option for many business owners because it does not have many of the startup and operating costs of most conventional employer-sponsored retirement plans. Many employers have also created a SEP IRA to contribute to their own retirement at a higher rate than a traditional IRA allows.
Small organizations prefer SEP IRAs because of payor eligibility requirements, which include a minimum age of 21, at least three years of employment, and a minimum salary of $650 in 2022 ($750 in 2023). Additionally, a SEP IRA allows employers to skip contributions in years when business is not doing well.
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SEP IRAs are treated like traditional IRAs for tax purposes and offer the same investment options. The same transfer and rollover rules that apply to traditional IRAs also apply to SEP IRAs. When an employer makes contributions to SEP IRAs, they receive a tax deduction on the amount contributed. Moreover, the company is not obliged to pay annual contributions; decisions about whether to contribute and how much can change each year.
The employer is not responsible for making investment decisions. Instead, the IRA custodian determines eligible investments and individual employee account owners make specific investment decisions. The trustee also makes payments, submits annual reports, and files all required paperwork with the IRS.
SEPIRA contributions vest 100% immediately and the IRA owner directs the investments. An eligible employee (including a business owner) who participates in his or her employer’s SEP must establish a traditional individual retirement plan (IRA) into which the employer will make SEP contributions.
Some financial institutions require that a traditional IRA account be designated as a SEP IRA before allowing contributions to the SEP account. Others may allow you to make SEP contributions to a traditional IRA, regardless of whether the IRA is designated as a SEP IRA.
Self Employed Retirement Plan Options
SEP IRA contributions vest 100% immediately, and account owners must select their investments from a list provided by the account manager.
Employer contributions cannot exceed
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