For many Malaysians, the word “retirement” conjures up images of a dream come true. Retirement, on the other hand, will be a nightmare for us if we don’t plan adequately and early enough. Given the rising cost of living and increasing rate of inflation, many Malaysians approaching retirement age may find it difficult to retire and maintain their preferred lifestyle. Whether you desire to work after retirement age or not is largely determined by how well you planned for your retirement finances.
When it comes to retirement funding options for Malaysians, we have the Private Retirement Scheme (PRS) and Deferred Annuity, both of which provide up to RM3,000 in tax reduction. Because of the tax benefits, these two planning strategies are even more appealing for retirement planning. Which one, however, is most suitable for you?
First, the Securities Commission of Malaysia oversees PRS, whereas Bank Negara Malaysia oversees delayed annuities. It all began with the government’s announcement of a tax incentive in Budget 2011. Since 2012, when the first PRS was introduced and insurance companies began to offer some appealing features on their deferred annuity plans, this topic has sparked interest in the financial sector.
PRS is a type of investment plan offered by asset management firms, in which a contribution is made in the same way that a unit trust cash investment is made. Your money will be split into two accounts when you make a contribution: sub-account A (70 percent) and sub-account B (20 percent) (30 percent ). There are currently eight PRS providers:
Deferred annuity is a type of insurance plan offered by insurance firms that invests your money for you and guarantees you a stream of income after a specific number of years. The term “annuity” refers to a regular revenue source.
Yes. Both plans also entitle you to a combined tax reduction of up to RM3,000 each year. This is in addition to your other tax relief categories, such as EPF contributions and life insurance premiums, which you have been receiving from the year of assessment 2012. Currently, tax relief is granted for a period of ten years (from year of assessment 2012 until 2021).
The performance of the fund(s) you choose determines the return on PRS, thus there is no guaranteed minimum return. Meanwhile, depending on how much and how long you contributed, as well as your entrance age, you may be eligible for some guaranteed income from a deferred annuity plan for a set length of time.
To supplement our EPF savings, both schemes are based on voluntary contributions. However, once enrolled in a deferred annuity plan, a minimum number of years of contributions must be made, for example, a minimum of ten years. If you stop giving halfway through, the amount you can get back is less than what you put in. In addition, if the policy has a surrender value, the insurance company may issue an automatic premium loan to keep the policy going. This loan will have a cost of 5 percent to 7 percent interest. When there is no longer any value in the policy, it will be lapsed. Contributors to PRS, on the other hand, can make contributions at any time and with any minimum amount determined by the various PRS providers. In most cases, a minimum commitment of RM100 is required for successive contributions. In terms of contribution, PRS has complete flexibility.
A contributor to a delayed annuity can surrender the plan in its entirety at any time, but doing so before the payout period is set will result in a tax penalty. Meanwhile, a PRS contributor can only withdraw money from sub-account B after one year, and if they do so before the retirement age set, they would face a tax penalty (currently set at age 55).
There will be no tax penalty if you withdraw only after reaching retirement age (for PRS) or according to the payout period selected (for delayed annuity). Please keep in mind that both plans are for retirement planning, and you are already eligible for tax benefits when you contribute.
As a result, it makes sense for the IRB to claim some of the money back in order to prevent contributors from withdrawing funds prematurely. This is also a way to close a loophole in the taxes system.
Yes. Premature withdrawal will result in an 8% tax penalty, as previously stated. Only the money you want to withdraw from PRS sub-account B will be debited.
In the case of deferred annuities, the 8% tax penalty will be determined based on the total premiums paid that were previously eligible for tax reduction. The PRS provider or insurance company will pay the tax penalty to the Inland Revenue Board (IRB). However, there are several exceptions to the 8% tax penalty, where donors can withdraw a portion or all of their contributions for the following reasons: death, total and permanent disability, serious illness, or permanent departure from Malaysia (only for PRS).
After your first year contribution, you can withdraw up to the amount available in your PRS sub-account B. In the case of a deferred annuity plan, partial surrender is not permitted. You can, however, request a premium decrease if you genuinely want to cash out some money from your plan. If your insurance has accrued cash value, you may be eligible to get a refund based on the amount saved on annual premiums. Please keep in mind that if the guaranteed income is amended, the guaranteed income (if any) will be revised and reduced as well.
This is critical because any money you save from these fees will immediately increase your retirement fund savings. In the case of PRS, all PRS providers have the option of charging donors a service fee ranging from 0% to 3%. It was thought to be particularly appealing when compared to the standard unit trust fund service fee of 5% to 7%. For PRS, some suppliers even charge a 0% service fee. You may look for the best PRS offer by shopping around.
Meanwhile, everything is incorporated into the premium amount for a deferred annuity. When we break it down and compare it to the identical service charge, we find that insurance companies charge a 5% service cost before allocating the remaining amount to the underlying funds chosen.
Another feature unique to PRS is the establishment of a Private Pension Administrator (PPA), which was established to oversee and administer the entire plan, as well as give a consolidated PRS statement. Because of this structure, PRS donors can freely and easily swap or transfer from one PRS provider to another at a low cost.
This option is not available for deferred annuity plans, however. Annuity policyholders are unable to switch from one insurance company to another.
There is one more benefit that is only available to PRS. In addition to the tax reduction, the government has provided an additional RM500 incentive targeted exclusively for young working adults in order to encourage them to begin planning and saving for their own retirement as early as possible. This was announced in the 2014 Budget. To be eligible, a PRS contributor must be a Malaysian between the ages of 20 and 30 (and not yet 31) during the effective period of 2014-2018. During the effective period, if you make a minimum of RM1,000 in PRS contributions in a calendar year, the government will provide you a one-time incentive of RM500 worth of units in your PRS sub-account A.
You should have a better understanding of the distinctions by now. Agents claim that a deferred annuity is preferable since it requires a commitment to pay premiums. They stated that a delayed annuity plan is superior for developing a person’s savings habit. Finally, we’ll discuss how disciplined we are when it comes to saving for retirement. Agreed? By the way, PRS consultants would argue that the guaranteed income from a deferred annuity plan limits our money’s upside growth potential. Although the return on a PRS investment is not guaranteed, it does not limit the upside potential that a PRS fund can create over time. Contributors might also ignore short-term volatility if they are investing for the long run.
Finally, which one is the better option for you is mostly determined by the qualities you are looking for. Do you have a strong sense of self-control? Is it important to you to have a steady source of income? So, in exchange for that assured income, do you mind sacrificing your upside potential return? Do you want to take advantage of the RM500 youth incentive?
Anyway, why limit yourself to one of the two options? You have the option of enrolling in both a PRS and a deferred annuity plan. Furthermore, the tax reduction provided was merely an incentive for you to begin saving for your retirement. And, to be honest, even if you saved RM3,000 every year, it would still be insufficient to save enough for your retirement. Finally, you should visit a financial advisor to determine how much retirement funds are required, and then devise a comprehensive strategy.
Again, it is critical that we begin planning for our retirement as soon as possible. No matter how brilliant a strategy is, if no action is performed, it is nothing more than a blueprint for you to look at. There is no such thing as starting retirement savings “too early” or “too young.” From now on, you have the power to decide whether you will suffer or enjoy your retirement years. You have the power to make a difference. So, before it’s too late, let’s act now.
How is a deferred annuity taxed?
- In the case of eligible annuities, you will be taxed on the entire withdrawal amount. If it’s a non-qualified annuity, you’ll simply have to pay income taxes on the earnings.
- The principal amount and its tax exclusions are evenly divided across the estimated number of instalments in your annuity income payments.
- In most circumstances, taking money out of your annuity before becoming 59 1/2 years old will result in a 10% early withdrawal penalty.
Is annuity income taxable in Malaysia?
Candidates studying for the ATX-MYS, Advanced Taxation exam should read this material to gain a thorough understanding of Malaysian trust taxation. The explanations in this article go beyond what would be anticipated of an ATX-MYS exam applicant, but they do help to increase understanding.
This article will focus on trusts in general rather than unit trusts or REITs (Real Estate Investment Trusts). Furthermore, the topic of a trust beneficiary’s “additional source income” will not be discussed because it is not included in the ATX-MYS syllabus.
Candidates should be familiar with the contents of the Public Ruling 2020/9 on Trust Taxation.
A. Trusts – the basics
Let us first establish common ground by analyzing the fundamentals of taxation before diving into the intricacies of taxation.
A trust is a relationship (not a legal entity in and of itself) in which one party (the settlor) transfers property, whether real, personal, tangible, or intangible, to another party (the trustee/s) for the benefit of a third party (the beneficiaries).
- Trustees – may be an individual or a corporation named in the trust document or, if necessary, by the court. A trustee might be either a professional or a layperson. The trustees are the legal owners of the trust property and are in charge of managing the trust’s affairs, including investing trust assets, accounting for trust asset transactions, reporting to beneficiaries, and filing tax returns on behalf of the trust. As a result, trustees have a fiduciary responsibility to the beneficiaries. Trustees are the trust’s representatives in terms of taxes.
- Beneficiaries are the trust property’s beneficial or equitable owners. Living individuals, another trust such as a charity, or legal businesses can all be beneficiaries. A trustee may be a benefactor himself. Beneficiaries will get the income and/or the property at the specified time, depending on the provisions of the trust.
When a trust deed or a will is executed, it creates an explicit trust or a testamentary trust, respectively.
The terms of an express trust would be specified in the trust deed as follows:
- Trustees’ powers and responsibilities include the ability to invest, the ability to change the beneficiaries’ interests, the ability to designate new trustees, and so on.
Madam Wealthy (the settlor) organized a trust for her two nephews, Lucki and Luckee, and transferred a rent-producing property to it. The property is held by the trustee for Lucki and Luckee’s benefit. The trust deed stipulates:
- The trustee has the authority to invest the trust funds in his or her best judgment.
- When Lucki and Luckee reach the age of 18, they will get a RM12,000 annuity.
- When the younger of the two reaches the age of 35, the rental property and the trust’s accumulated funds will be transferred to Lucki and Luckee.
The trust emerges in a testamentary trust when there is a length of time between:
- the date on which the deceased estate’s administration was completed – i.e. when the residuary estate was ascertained (or ascertainable), and
- The day on which the estate’s property and funds are dispersed to the legatees and beneficiaries.
Well, Mr. On February 1, 2020, you died testate (that is, without a will). The executor (assigned by the will) acquired all assets of the deceased estate and paid off all outstanding debts, effectively determining the deceased estate’s residue and concluding the administration of the deceased estate on October 31, 2020.
Mr. Well Thee’s will stated that his estate’s properties and accumulated funds would be transferred to his three children only after his widow died. Meanwhile, the widow will be paid an annuity of RM15,000 each year for the rest of her life. The three children would get 60 percent of the distributable income from the deceased estate’s assets in equal parts, while the remaining 40 percent would be accumulated until the widow’s death.
On November 1, 2020, a testamentary trust has effectively established in the aforesaid scenario. The executor of the will then becomes the trustee, with the widow and her three children as the trust beneficiaries.
The trust will run from November 1, 2020, until the trust’s assets and funds are given to the three children following the widow’s death.
Trusts, like other chargeable people, are subject to the Income Tax Act’s current tax principles and requirements. There are also special provisions relating to trust income and trust income, which are as follows:
The exam does not require candidates to know section numbers; however, they are supplied here for convenience.
The trust body is made up of trustees and is a chargeable person for income tax purposes. The Income Tax Act holds all trustees of a trust jointly and severally liable for all acts and things required by the Act.
The trust and the trustees have a principal-agent relationship for tax purposes, which means they keep records, file tax reports, and pay any taxes or debts owed to the government. It should be noted, however, that the trustees of a trust are only responsible for paying taxes, debts, or penalties up to the amount of money available from the trust. This means that the trustees cannot be forced to pay the trust’s tax debts out of their own pockets!
If any of the trustee members of a trust body is a Malaysian resident in the relevant year, the trust is termed a resident trust.
For the relevant basis year, however, a trust is regarded a non-resident trust if the following conditions are met:
- The trust was established by a person or individuals who were not Malaysian citizens.
The following are the implications of a trust’s resident status for tax purposes:
- The share of trust income owing to a beneficiary may be deducted from the total income of a resident trust.
- Any annuity provided to a beneficiary by a resident trust is regarded to be derived from Malaysia, regardless of whether the trust has any total income in the assessment year.
A trust, like other chargeable people, is only taxed in Malaysia on income earned from the country. When transferred to Malaysia, all income earned outside of Malaysia is tax-free.
A trust, like a company, limited liability partnership, or co-operative society, can use the Gregorian calendar year or a financial year ending on a day other than December 31 for its accounting period.
A trust body is considered to be earning money from sources such as business, rentals, interest, dividends, and other kinds of income. It can also be a partner in a partnership and be taxed on its share of the partnership’s earnings. Trusts are subject to the same tax principles and rules as other taxable people.
Schedule 1 states that a trust, like a corporation, is taxed at the current fixed rate of 24 percent on its chargeable income. However, unlike a corporation, a trust does not qualify for the favorable two-step rates of 17 percent and 24 percent for small and medium businesses, regardless of the value of the trust property.
In this regard, a trust is taxed at a higher effective rate than a resident individual who is eligible for personal tax relief and scaled rates ranging from 0% to 30%.
The Income Tax Act does not define this term. The conventional definition is utilized, which is the amount of money available for distribution by the trust after subtracting all expenses where money has really gone out. Some of the expenses paid out this way may not be tax deductible. As a result, the trust’s distributable income is likely to be smaller than its overall income in any given year. Similarly, the distributable income for the year may be higher than the overall income for the trust: some types of revenue may be tax exempt, and some tax deductions (such as capital allowance) may not require cash outlays.
It’s important to remember that the quantity of distributable revenue has no bearing on the total income calculation. Nonetheless, it is a significant figure: the share of the trust’s distributable income that belongs to a certain beneficiary is used to calculate the fraction when calculating the beneficiary’s share of the trust’s total income.
What is deferred annuity and example?
Deferred annuity contracts provide you greater control over your money than an instant annuity. When a deferred annuity reaches the annuitization phase, for example, the owner can choose to receive periodic withdrawals, receive the entire investment as a one-time lump amount, or transfer all assets to another account.
How are annuity taxed?
People are finally becoming interested in annuities as a means of retirement preparation. I’ve been writing about life annuities for years, but it wasn’t until a recent column that readers began asking a lot of questions about how these income-for-life generators function (read it online here). Some of the most intriguing questions have been included here, along with responses from insurers and advisers.
A registered annuity generates payments that are fully taxed as regular income if it is funded with money from a registered retirement savings plan or a registered retirement income fund. According to Manulife Financial, 55% of annuity assets are registered, while 45% are held in non-registered accounts.
There are a few different forms of non-registered annuities, but we’ll just focus on the prescribed annuity. Individuals can benefit from these annuities because they are taxed favorably and are generally available. The payments in a specified annuity are a mix of your own cash being returned to you and interest. According to John Natale, assistant vice-president of tax, retirement, and estate planning services at Manulife, tax is paid on the interest component.
In the table below, you can see how taxes on payments from prescribed annuities purchased at age 65 or 70 could be nil. You’ll also notice that beginning in 2017, revisions will boost the taxes on prescribed annuities. Mr. Natale said, “The basic message is that December 31, 2016, is clearly a date to be mindful of.”
A estimated lifespan for the annuity buyer is included in the formula used to compute the taxable amount in an annuity payment. In 2017, longer lifetime expectancies will come into play, resulting in a higher tax bill in our case. Even so, Mr. Natale points out that for a 65-year-old male, not even 10% of the payments from the annuity example in our chart would be taxable under 2017 standards. “It’s worse than it was,” he admits, “but it’s still incredibly tax-effective.”
When it comes to marketing annuities vs other products, how are insurance agents and advisers compensated?
Clay Gillespie, a financial adviser and managing director at Rogers Financial Group in Vancouver, says he would earn a 2.5 percent commission on money clients use to buy an annuity. In comparison, he claims that in a fee-based account where the client pays 1% of assets, advisers and their firms may make more in just a few years. “Annuities aren’t as profitable as other investment options.”
70 and older, according to Rino Racanelli, managing partner at MRH Financial Services and a contributor to the journal Canadian MoneySaver. Why is it so late? Because the longer you wait to buy an annuity, the less time the insurance selling it expects to have to pay you. As a result, your payments will be more than if you bought at a younger age. Mr. Racanelli explains, “The older you get, the better it gets.” “It’s even better if you’re a man because your life expectancy isn’t as high as a woman’s.”
What is tax-deferred income?
Instead of paying taxes up front, you pay federal income taxes when you take money from your tax-deferred investment. Any earnings generated by your donations while they are invested are also tax-free.
Some investments allow you to invest pre-tax dollars, which means that neither your contribution nor any prospective gains are taxed until you withdraw them.
What is an deferred annuity?
A deferred annuity is an agreement with an insurance company to pay the owner a regular income or a lump payment at a later period.
How are deferred annuities calculated?
Annuity payment due, effective rate of interest, number of payment periods, and deferred periods are all used in the formula for a deferred annuity based on annuity due (where the annuity payment is made at the start of each period).
Is investment income taxable in Malaysia?
This exemption made Malaysia, like Hong Kong and Singapore, a country that gave outbound investments preferential tax treatment.
In keeping with Malaysia’s pledge to address the European Union’s concerns about damaging tax practices, a proposal announced on October 29, 2021 proposes to eliminate this exemption.
The abolition of this exemption could have a major impact on the post-tax returns of Malaysian investment vehicles that have amassed a portfolio of non-Malaysian assets and instruments.
Where these investments currently produced tax-free income in the form of foreign interest, coupons, and dividends, starting January 1, 2022, this income would be taxable at a rate of 24 percent.
In the short term, this means that when the earnings are divided, the investors will take a 24 percent hit on the investment returns of these vehicles.
Depending on the legislation of the investor’s jurisdiction, the 24 percent tax paid at source may or may not be refunded.
The tax impact appears to be limited to the income flow from the holding of these non-Malaysian investments in unit trust structures, and does not appear to affect any gains from the sale/realisation of the investments directly, as Section 61(1) of the MITA states that gains arising from the realisation of investments are not treated as income of a unit trust.
In short, because non-Malaysian assets will now be subject to a 24 percent tax, unit trust funds will lose a large amount of their investment earnings.
Profits/gains on the sale of such investments, on the other hand, will not be taxed.
In light of this, let us look at what alternative unit trust funds and investment vehicles are available to protect the expected returns on non-Malaysian securities investments.
Interest paid or credited to any unit trust or listed closed-end fund is tax deductible under paragraph 35 of Schedule 6 if the following conditions are met:
> The interest is paid on government-issued or guaranteed securities or bonds; or
> The interest is on debentures or sukuk (other than convertible loan stock) approved or allowed by the Securities Commission and lodged with it (SC).
Schedule 6 has similar paragraphs that exempt interest income, but they require the underlying document to be issued in Malaysia, by the Malaysian government, or submitted with the SC.
Current investment vehicles in Malaysia with a non-Malaysian investment portfolio have few if any other options for preserving their tax-free returns unless they divest their non-Malaysian investments and reinvest in instruments originating in Malaysia that have been approved by the government or filed with the SC.
This fact leaves investment managers with few options and little time to respond because there is no analogous exemption for foreign-sourced revenue.
So, here are some things to think about if you’re a Malaysian investment manager with a sizable non-Malaysian portfolio:
> Non-Malaysian investments should be reevaluated to see if holding them to maturity or selling them would provide a better return for the investor.
In the case of a unit trust fund in Malaysia, the income stream from holding will be subject to a 24 percent tax, however the gains will not be subject to tax because they will be capital gains or simply not taxable.
> Selling these investments, particularly debt securities, is a difficult decision to make because one must examine the long-term yield and returns guaranteed to investors.
These instruments were purchased after assessing the longer-term possibilities in some cases when capital was guaranteed or a particular amount of return was promised.
With the earlier than expected disposal, this future potential has been dramatically interrupted, putting future predictions and obligations in peril.
> Investment managers will need to reassess the new post-tax returns of non-Malaysian investments in comparison to Malaysian investments.
The tax legislation continues to provide a wide range of tax exemptions on Malaysian sourced interest income from securities and debt certified by the SC, and dividends sourced from Malaysia under the single-tier system are still tax exempt.
If Malaysian stocks and debt instruments can produce a better return net of tax, then a portfolio shift toward more Malaysian-based investments should be explored, assuming all other conditions remain unchanged.
This is good news for Malaysian companies looking to issue debt or equity in 2022, since they now enjoy a 24 percent post-tax advantage over equivalent international investors.
> Investment managers will need to revise their prospectuses and information memorandums in the future to reflect the new tax situation from an administrative standpoint.
This might be a one-time expense to do this exercise across the board, which would have a minor impact on investor returns according to the SC’s requirements.
> Because unit trust funds are normally excluded from a wide range of taxes, it is anticipated that they would have provided a “zero” yearly tax estimate.
With the impending repeal, asset managers will have to re-evaluate the tax status of all their funds with non-Malaysian investments to see if their yearly tax estimates need to be updated.
Any unit trust fund with a fiscal year ending in 2022 should complete this exercise to update their yearly tax estimate with the Inland Revenue Board in order to avoid fines for under-estimating tax when the funds file their tax returns for the year of assessment 2022.
Time is running short for investment managers to restructure their portfolios, as the real legislation is scheduled to be published and obtain royal assent in December 2021, with modifications taking effect on January 1, 2022.
As a compromise, the government may seek to give Malaysian investment vehicles, particularly retail investment vehicles like unit trust funds and investment linked funds, a grace period so that the Malaysian population is not financially burdened unwittingly.
When the government removed the tax exemption on wholesale money market funds a few years ago, similar transitory measures were granted.
Deloitte Malaysia’s financial services industry tax leader is Mark Chan. The writer’s opinions are his or her own.
What do you mean by annuity?
An annuity is a contract between you and an insurance company in which you pay a lump-sum payment or a series of payments in exchange for regular payments, which can start right away or at a later date.
What is annuity certain?
An annuity certain is a type of investment that pays a person, their beneficiary, or their estate a series of payments over a set period of time. It is a type of retirement income investment offered by insurance companies. The annuity can be taken as a lump amount as well. An annuity certain pays a higher rate of return than a lifetime annuity since it has a specified expiration date. The most common terms are 10, 15, and 20 years.
What is deferred annuity and private retirement scheme PRS?
What is the difference between unit trust firms’ Private Retirement Schemes and insurance companies’ Deferred Annuity Plans?
K.C.Chong, the Managing Director of SAC Wealth Management Sdn. Bhd., discussed his findings about these new private retirement schemes during a recent webinar I hosted with him. Here’s what he had to say:
I compared the benefits of a Private Retirement Scheme with a Deferred Annuity. We can see that both of these categories are eligible for the same RM3000 tax break.
The Security Commission oversees the Private Retirement Scheme, whereas Bank Negara Malaysia oversees the Deferred Annuity.
Unit Trust Companies give PRS, whilst Insurance Companies offer Deferred Annuities.
There is no set number of intervals or contribution term with PRS. There is no set interval here, so you can put in any amount you want at any moment. Let’s imagine you wish to skip one or two years of school. It makes no difference. In the case of a Deferred Annuity, once you’ve settled on an amount, say RM3000 each year, you’ll have to set it aside for 10 years. This, of course, is contingent on how much or how far you want to benefit from the tax break.
Another distinction is that if you invest in Equity Funds, your capital is not guaranteed. Annual income is assured with a Deferred Annuity, on the other hand.
There are several parties engaged in PRS: a Private Pension Authority, a PRS Provider (which is a Unit Trust Company), and the Scheme Trustee. Because the government wants the Unit Trust Company to ensure that the trust money is in good hands, this is the case. Only the insurance business, which is regulated by Bank Negara, is involved in Deferred Annuity.
The money in PRS is subject to estate freezing. You’ll need a GP (Grand of Probate) or LA (Letter of Estate Administration) to unfreeze and retrieve money when money comes into estate after a person dies. With Deferred Annuity, all you have to do is make a nomination. There is no need to bring a GP, do a probate, or go to the LA to withdraw money because it will not be frozen if the nomination is done correctly.
Which is the superior option? Is it better to invest in a PRS or a Deferred Annuity Plan? It is up to the consumer to decide how he or she wishes to use the tax benefit.
