7B.7 The PRS Default Option and Tax Incentives for Members and Employers
Key Takeaways
Under the PRS default option, members below 45 are allocated to the growth fund, members aged 45 to 54 to the moderate fund, and members aged 55 and above to the conservative fund.
A PRS Provider must notify a default-option member one month before age 45 or 55 that the core fund holding will be switched, including general investment advice and outlook.
Default-option switching at the Switch-in Date is executed in equal proportions over five years, with the first switch on the Switch-in Date and the rest within 10 business days of each anniversary.
Individuals can claim PRS tax relief of up to RM3,000 a year for years of assessment 2012 to 2030.
Employers contributing to PRS for employees can claim a tax deduction capped at 19% of the employee's remuneration, including mandatory EPF contributions.
When the Default Option Applies
The default option applies when a member chooses a PRS Provider but does not choose a fund. A common case: an employer contributes for an employee who has not selected a fund. The contribution is allocated automatically by the member's age.
Before that, the PRS Provider must carry out due diligence on behalf of the PPA: establish the member's full and true identity, verify identification documents where required, and establish the member's financial position, investment experience and investment objectives.
The Three Core Funds
| Member's age | Core fund | Investment approach | Volatility the member is assumed to tolerate |
|---|---|---|---|
| Below 45 | Growth fund | Grow the portfolio | High |
| 45 to 54 | Moderate fund | Grow the portfolio while seeking income | Moderate |
| 55 and above | Conservative fund | Generate consistent income for use or decumulation | Minimal |
The age bands follow a life-cycle approach: younger members have time to recover from market falls, while members near or past 55 are moving from accumulation to decumulation and cannot afford to sit out volatile cycles.
- A member may actively choose any core fund even if it does not match their age.
- If a member makes a first contribution within a month before turning 45 or 55, the provider must allocate it to the moderate or conservative fund respectively.
- When a member is placed in the default option, the provider must tell them within a reasonable time and explain how the default option works.
Switching as the Member Ages
| Step | Rule |
|---|---|
| Notice | One month before the member turns 45 or 55, the provider must notify the member in writing that their core-fund investment will be switched under the default rules unless the member instructs otherwise; the notice must include general investment advice and outlook |
| Switch-in Date | Units in the current core fund are redeemed and units in the next core fund bought, starting on the Switch-in Date (the current PRS Guidelines require this before the end of the next calendar month after the birthday) |
| Phasing | The switch is executed in equal proportions over five years, based on the units remaining: the first switch on the Switch-in Date and the next four within 10 business days of each anniversary |
Example: Puan Mei turns 45 holding 10,000 units in the growth fund and stays in the default option. At the Switch-in Date one-fifth of her remaining growth units (2,000) is switched to the moderate fund. On each of the next four anniversaries a further equal portion of the remaining units is switched, so after five years she is fully in the moderate fund. The phasing avoids moving everything at one market price.
Is the Default Option Right for Everyone?
No. The study guide warns that the age-based default may not suit every member: some young investors are risk-averse and prefer bonds, and some older investors want more growth. The PRS Consultant should assess each member's objectives and risk tolerance, explain the volatility of each fund and confirm the member is comfortable before recommending the core funds.
Tax Incentives for PRS
| Who | Incentive |
|---|---|
| Individual members | Personal tax relief of up to RM3,000 a year on contributions, available from year of assessment 2012 to 2030; it can cover contributions to more than one PRS |
| Employers | A tax deduction for contributions made for employees, on top of mandatory EPF, with the combined deduction capped at 19% of the employee's remuneration |
| The funds | PRS funds are exempt from tax on interest income (FIMM describes PRS fund income as tax-exempt), which can boost returns compared with non-exempt funds |
| Distributions | Distributions paid as units and reinvested in the PRS are not liable to tax, according to the FCE study guide |
What the relief is worth
Relief reduces taxable income, not tax payable ringgit for ringgit. The saving equals the contribution relieved multiplied by the member's marginal tax rate. A member who contributes RM3,000 and pays tax at an illustrative marginal rate of 11% saves about RM330 in tax; at 24% the saving would be RM720. The PPA's website has the latest rules.
The flip side is the 8% tax penalty on most pre-retirement withdrawals from sub-account B (section 7B.9), which recovers part of the incentive if money leaves the scheme early.
A 47-year-old member joins a PRS through an employer scheme and does not select a fund. Where are the contributions allocated?
A money market fund chosen by the Consultant
The moderate fund
The conservative fund
The growth fund
How is a default-option member's holding switched to the next core fund at the Switch-in Date?
In equal portions over five years, starting on the Switch-in Date
Only after the member applies in writing to the PPA
In twelve equal monthly instalments over one year
All at once, on the member's 45th or 55th birthday
What is the maximum annual personal tax relief for PRS contributions available until year of assessment 2030?
RM1,000
RM2,500
RM3,000
RM6,000
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