The Employees Provident Fund (EPF) is Malaysia’s go-to retirement savings plan, and it recently had a makeover that got everyone buzzing. The new structure divides your EPF savings into three accounts: Account 1 (retirement), Account 2 (health), and the shiny new Account 3 (flexible).

This is supposed to give members more flexibility, catering to their various needs. But is it really the smart move we need, or are we setting ourselves up for a retirement disaster? Here are some thoughts.

Account 1: The retirement stash

Account 1 is all about your golden years. It’s getting bumped up to 75% of your EPF savings, a change aimed at counteracting those emergency withdrawals that have left many retirement plans looking sad.

With a higher percentage, the idea is to make sure there’s enough to keep you comfy in retirement.

Account 2: The health fund

Account 2 is your health fund, now sitting at 15% of your total EPF savings. You can use this for medical expenses or to pay off your home loan.

If you’re allergic to debt, you might prefer using this chunk to whittle down your mortgage and save you some interest in the long run (which isn’t highly recommended, by the way, as it would forego ~5% in EPF dividend to save ~4% in mortgage interest).

Account 3: The new kid on the block

Then there’s Account 3, which works like a flexible savings account. Need cash in a pinch? This is where you go. Covid-19 showed us just how much we might need quick access to our money.

EPF allowed members to make special withdrawals during the pandemic, and people loved it (even if EPF’s accountants didn’t). Now, members below age 55 will have the option to transfer an initial amount to the third flexible account until Aug 31.

So, why add a third account?

Pandemic withdrawals totalled RM145 billion, or 14.5% of EPF’s total assets. Suddenly folks realised: “Hey, that’s my money in there, and I want it now, not when I’m old and grey!”

This mindset shift led to the demand for more flexibility, hence the birth of Account 3. It’s designed to give members control, letting them dip into their savings for emergencies without touching the retirement funds.

The worry: retirement security

More flexibility sounds great, but it comes with a catch: if everyone were to treat their EPF like a piggy bank, would there be anything left when they actually retired? The fear is that we might solve today’s money problems but create bigger ones for our future selves.

To counterbalance this, EPF has increased the retirement account portion to 75%. It’s meant to ensure there’s enough stashed away for when you’re finally done working.

A mother’s love…?

Think of EPF like a financially savvy mum. She knows you’d rather spend your money on the latest gadgets and holidays, but she’s here to make sure you’re saving for the future. When you were a kid, she gave you pocket money. As you grew older, she taught you to manage it. And when you hit a rough patch, she took control again to steer you back on track.

EPF’s new rules are a lot like this: giving you freedom but also ensuring you don’t blow all your money before retirement.

Reducing Account 2: is this smart?

Lowering Account 2’s share from 30% to 15% seems wise. Many people use this money to pay off mortgages, but since home-loan rates are often lower than EPF’s dividends, you might be better off letting EPF grow your money. Keeping more money in EPF means more growth for your retirement fund.

Differentiating dividend rates

One suggestion to make EPF even better is to offer different dividend rates for the different accounts. Singapore’s CPF system does this, with higher rates for long-term savings. This could encourage members to put more into Account 1, boosting their retirement savings further.

So, is the new structure good for you?

For the average person, these changes are mostly positive: they simplify financial planning and ensure a stronger retirement fund. However, if you’re an investment whiz, you might find the restrictions a bit limiting.

Oh wait! Recent developments

As of July 19, some 3.8 million or 29.3% of the 13.1 million EPF members under 55 have opted to have an initial amount in their Flexible Account, with a total transfer amount of RM12.6 billion, while RM5.6 billion has been transferred to Account 1.

The latter transfer has resulted in increased member savings, with an additional 43,000 new members achieving basic savings. Meanwhile, 3.4 million members, or 26.2% of the 13.1 million EPF members under 55, have made withdrawals from the Flexible Account amounting to RM8.9 billion.

According to second finance minister Amir Hamzah Azizan, these withdrawals have not significantly impacted EPF as the amounts fall within the Strategic Asset Allocation, which assigns 2-6% of EPF’s investment assets to cash and money-market instruments.

So, just after a few months of implementation, we can see there have been some benefits to this new structure, such as:

• allowing EPF better cash flow management and avoiding the need to liquidate immature investments to meet withdrawal needs;
• helping many members increase their Account 1 savings for retirement; and
• providing members who need money the ability to use Account 3 as needed.

In the grand scheme of things, it seems like EPF is trying to strike a balance between flexibility and security, ensuring members can enjoy both present financial freedom and future retirement stability.

This article first appeared on kclau.com.

KC Lau’s first book ‘Top Money Tips for Malaysians’ has sold thousands of copies. He launched the Money Automation System, the first online personal finance course specifically designed for Malaysians. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.