Which of the following is a voluntary retirement scheme in Malaysia?

A Private Retirement Scheme. The study guide classifies EPF as mandatory, while PRS, annuities and employer-sponsored retirement schemes are voluntary because minimum contributions are not mandated by law.

What range does the study guide give for the income replacement ratio needed to maintain the same standard of living in retirement?

60% to 90%. The study guide states that the income replacement ratio is usually between 60% and 90% of working income before retirement.

Which describes a defined contribution scheme?

The final nest egg depends directly on contributions made and the returns earned on them. Private sector schemes such as EPF are defined contribution schemes, with a direct link between the amount contributed, the returns on contributions and the resulting nest egg.

7B.1 The Malaysian Pension Landscape and the | Free Guide 2026

Two Ways to Divide the Landscape

The study guide categorises Malaysian pension and retirement schemes along two lines.

1. Public sector vs private sector

Type	Design	Examples
Public sector schemes	Defined benefit: beneficiaries do not contribute; benefits are set by formula	KWAP (Kumpulan Wang Persaraan (Diperbadankan)) funds civil service pensions; LTAT (Lembaga Tabung Angkatan Tentera) for armed forces personnel
Private sector schemes	Defined contribution: a direct link between contributions, investment returns and the final nest egg	EPF (governed by the Employees Provident Fund Act 1991, with employee and employer contributions); employer-sponsored retirement schemes approved under section 150 of the Income Tax Act 1967

2. Mandatory vs voluntary

Type	Meaning	Malaysian examples
Mandatory	Required by law	EPF: all private sector employees contribute part of their salary (the employee rate is 11% as of 2025); savings are withdrawable at retirement, with some earlier withdrawals for specific purposes
Voluntary	Minimum contributions not mandated by law	Employer-sponsored retirement schemes, annuities and PRS

How Much Is Enough?

Retirees face the risk that savings will not last, given uncertain life expectancy and inflation. The study guide's tables illustrate the scale.

Lump sum needed at retirement (20 years of retirement, the lump sum earning 2% a year):

Monthly income needed	Lump sum needed
RM2,000	RM392,434.40
RM3,000	RM588,651.60
RM4,000	RM784,868.05

Annual saving needed to build that lump sum (savings compounding at 4% a year):

Monthly retirement income	30 years to save	20 years	15 years	10 years
RM2,000	RM6,997	RM13,179	RM19,599	RM32,686
RM3,000	RM10,495	RM19,768	RM29,398	RM49,029
RM4,000	RM13,994	RM26,357	RM39,197	RM65,372

Example: a 40-year-old who wants RM3,000 a month from age 55 has 15 years to save and needs to put aside about RM29,398 a year at 4%. Starting earlier cuts the yearly requirement sharply: with 30 years to save, the same goal needs about RM10,495 a year. Different assumptions change the numbers, but the message holds: a substantial amount must be saved for an acceptable retirement.

Where the numbers come from

The lump sums are the present value of 20 annual payments of the yearly income needed, discounted at 2%. For RM3,000 a month (RM36,000 a year):

\text{Lump sum} = 36{,}000 \times \frac{1 - 1.02^{-20}}{0.02} \approx \text{RM}588{,}652

The annual savings figures are the level yearly amounts that grow, at 4%, to that lump sum:

\text{Annual saving} = 588{,}651.60 \times \frac{0.04}{1.04^{15} - 1} \approx \text{RM}29{,}398 \text{ (15 years)}

You will not need to derive these in the exam, but understanding the logic helps explain to clients why starting early and earning a reasonable return both matter: halving the saving period from 30 to 15 years nearly triples the yearly saving needed (RM10,495 to RM29,398).

The three variables a client can change

Lever	Effect
Start earlier	More years of contributions and compounding; much smaller yearly amounts
Earn a higher return (with suitable risk)	Less saving needed for the same goal
Retire later or plan a lower income	Fewer years to fund, or a smaller lump sum

EPF Plus Voluntary Savings

The study guide concludes that a retiree's nest egg should combine mandatory EPF savings with voluntary schemes such as PRS:

EPF provides the minimum savings.
PRS helps maintain the lifestyle the retiree wants.

The income replacement ratio

The income replacement ratio is the percentage of working income needed in retirement to keep the same standard of living, usually 60% to 90%. A retiree who reaches this ratio through a combination of EPF withdrawals and income from investments like PRS and fixed deposits should be comfortable.

Example: someone earning RM6,000 a month before retirement would, at a 70% ratio, need about RM4,200 a month. If EPF savings can support RM2,500 a month, the remaining RM1,700 must come from PRS, other investments, or other income.

Who Bears the Risk?

Feature	Defined benefit (for example civil service pensions)	Defined contribution (EPF, PRS)
What is promised	A benefit set by formula, such as a percentage of final salary	Nothing fixed: the benefit is whatever contributions and returns have built up
Who bears investment risk	The sponsor (for civil servants, the government through KWAP)	The member
Who bears longevity risk	The sponsor, if the pension is paid for life	The member, who may outlive the savings
Portability	Tied to the employer or service	Belongs to the member (PRS can move between providers)

This is why PRS members need advice on asset allocation and withdrawals: in a defined contribution scheme, the outcome rests on their own choices.

Exam Pointers

Defined benefit (public sector) vs defined contribution (EPF, PRS).
Mandatory: EPF. Voluntary: PRS, annuities, employer-sponsored schemes.
Replacement ratio 60–90%.
Larger yearly savings are needed the later one starts.

FIMM Combined Examination

7B.1 The Malaysian Pension Landscape and the Adequacy of Retirement Savings

Key Takeaways