Towards our golden years
OLD is gold! However, just as the price of gold has spiralled, the cost of living in those golden years has also increased.
To add insult to injury, the tax refunds accruing to senior citizens from their dividend income have decreased in recent years and will totally vanish after 2013 due to the payment of tax exempt dividends under the single-tier tax system.
This reduction in tax refunds till 2013 can be minimised if senior citizens invest in companies which pay large taxed, rather than tax-exempt, dividends. In addition, those companies should have sufficient franking credit to support future taxed dividends and should not have elected to pay the tax-exempt dividends referred to earlier (published accounts should provide this information). Judging from the how vocal (and at times long-winded) retirees are at annual general meetings, they can make their point loud and clear we want taxed dividends.
Allowing senior citizens initial public offering (IPO) preferential allocations will provide a measure of compensation from the decreased and in future, total absence of such tax refunds. This nil cost measure to the Government merits early implementation.
Further, more trust funds meant for the investors from the golden age group may be introduced to provide a steady and secure revenue stream generally to those with low taxable income.
Room for improvement
A survey has shown that only 5% of Malaysians are financially ready for retirement. If this is the situation, there is certainly much room for improvement. Increasing life span and cost of living, medical expenses included, aggravate the situation as golden years' budgets, if these were prepared, may no longer hold good. It will be less taxing on future generations and the Government if adequate preparation for those golden years is currently made. Speaking of tax, improving our tax laws in Budget 2012 to promote such preparation would be a good move.
Some employers have set up retirement benefit schemes for their employees and have made payments to such schemes in addition to the minimum contributions to the Employees Provident Fund (EPF). Others have chosen to increase their employers' contribution to the EPF. There is currently a 19% limit on tax deductible contributions to the EPF. This ceiling was gradually increased from 15% in the 1990s but has not been improved upon in the last 11 years. It would be excellent if generous employers are not deterred from deciding to contribute to retirement funds more than 19% of their employees' remuneration by increasing this cap to 25%.
Repeated calls for an increase of the current RM6,000 deduction limit in respect of contributions to approved retirement funds and life assurance payments have been consistently turned down. This ceiling was last increased in 2005 from RM5,000 to RM6,000 and prior to that in 1994 when the deduction was raised from RM3,500 to RM5,000.
In this connection, it is interesting to note that Thailand accords a maximum deduction of RM60,000 (600,000 baht) for contributions to retirement funds and life assurance premiums. Singapore has also promoted greater savings towards retirement funding by allowing up to RM34,000 (S$14,000) deduction for voluntary cash Central Provident Fund (CPF) top ups. This deduction is in addition to the normal deduction caps of RM37,500 (S$15,300) for employees and RM75,000 (S$30,600) for the self-employed in respect to contributions to their provident fund and life assurance. If Malaysia adopts the same perspective as our neighbours, there is much room to increase our current deduction ceiling of RM6,000.
High medical costs
Medical costs tend to increase in the golden years. There is currently a tax relief limit of RM3,000 in respect of premiums for educational and medical benefits. We suggest that there should be a separate relief in respect of medical insurance with a very much higher deduction limit. This move will alleviate some of the strain on government hospitals and cost of public medical care.
Since the announcement of the Private Pension Fund (PPF) scheme in Budget 2011, not much more has been revealed about this move and we look forward to gaining more information in Budget 2012. We are sure that if the Government offers adequate separate tax deductions for PPF contributions, it will encourage provision for retirement through this route.
In addition, to kick start the PPF, employers should continue to be allowed a deduction for a special contribution upon the establishment of an approved fund. Currently, the special contribution is based on the last six years remuneration of the employees. A successful PPF would be in line with our national Capital Market Master Plan.
Greater self-dependence
The EPF hopes that the retirement age for employees could be extended to 60 or thereabouts. Any extension of the retirement age will reduce the funding requirement in the golden years. To promote greater self-dependence, senior citizens who are employed beyond the retirement age and any extension thereof, may be given tax exemption where chargeable income arising from employment does not exceed RM35,000. The maximum tax forgone by the Government would be RM1,525 per individual but the amount arising towards retirement funding and alleviation of dependence on others would be disproportionately larger at RM55,000.
If future generations and ultimately the Government are to be spared the burden of bearing the cost of venerable citizens, it is apparent that much more remains to be achieved currently by the Government and the rakyat to preserve the shine of those golden years and the above measures will be of assistance.
By RONNIE LIM and YEE WING PENG
Ronnie Lim was Deloitte Malaysia's country tax leader. Having transitioned this leadership role to Yee Wing Peng earlier this year, Ronnie continues with the firm as advisor. He can empathise with senior citizens and advocates adequate retirement planning.
To add insult to injury, the tax refunds accruing to senior citizens from their dividend income have decreased in recent years and will totally vanish after 2013 due to the payment of tax exempt dividends under the single-tier tax system.
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| A file picture shows EPF’s head office in Kuala Lumpur. The fund hopes that the retirement age for employees could be extended to 60. |
Allowing senior citizens initial public offering (IPO) preferential allocations will provide a measure of compensation from the decreased and in future, total absence of such tax refunds. This nil cost measure to the Government merits early implementation.
Further, more trust funds meant for the investors from the golden age group may be introduced to provide a steady and secure revenue stream generally to those with low taxable income.
Room for improvement
A survey has shown that only 5% of Malaysians are financially ready for retirement. If this is the situation, there is certainly much room for improvement. Increasing life span and cost of living, medical expenses included, aggravate the situation as golden years' budgets, if these were prepared, may no longer hold good. It will be less taxing on future generations and the Government if adequate preparation for those golden years is currently made. Speaking of tax, improving our tax laws in Budget 2012 to promote such preparation would be a good move.
Some employers have set up retirement benefit schemes for their employees and have made payments to such schemes in addition to the minimum contributions to the Employees Provident Fund (EPF). Others have chosen to increase their employers' contribution to the EPF. There is currently a 19% limit on tax deductible contributions to the EPF. This ceiling was gradually increased from 15% in the 1990s but has not been improved upon in the last 11 years. It would be excellent if generous employers are not deterred from deciding to contribute to retirement funds more than 19% of their employees' remuneration by increasing this cap to 25%.
Repeated calls for an increase of the current RM6,000 deduction limit in respect of contributions to approved retirement funds and life assurance payments have been consistently turned down. This ceiling was last increased in 2005 from RM5,000 to RM6,000 and prior to that in 1994 when the deduction was raised from RM3,500 to RM5,000.
In this connection, it is interesting to note that Thailand accords a maximum deduction of RM60,000 (600,000 baht) for contributions to retirement funds and life assurance premiums. Singapore has also promoted greater savings towards retirement funding by allowing up to RM34,000 (S$14,000) deduction for voluntary cash Central Provident Fund (CPF) top ups. This deduction is in addition to the normal deduction caps of RM37,500 (S$15,300) for employees and RM75,000 (S$30,600) for the self-employed in respect to contributions to their provident fund and life assurance. If Malaysia adopts the same perspective as our neighbours, there is much room to increase our current deduction ceiling of RM6,000.
High medical costs
Medical costs tend to increase in the golden years. There is currently a tax relief limit of RM3,000 in respect of premiums for educational and medical benefits. We suggest that there should be a separate relief in respect of medical insurance with a very much higher deduction limit. This move will alleviate some of the strain on government hospitals and cost of public medical care.
Since the announcement of the Private Pension Fund (PPF) scheme in Budget 2011, not much more has been revealed about this move and we look forward to gaining more information in Budget 2012. We are sure that if the Government offers adequate separate tax deductions for PPF contributions, it will encourage provision for retirement through this route.
In addition, to kick start the PPF, employers should continue to be allowed a deduction for a special contribution upon the establishment of an approved fund. Currently, the special contribution is based on the last six years remuneration of the employees. A successful PPF would be in line with our national Capital Market Master Plan.
Greater self-dependence
The EPF hopes that the retirement age for employees could be extended to 60 or thereabouts. Any extension of the retirement age will reduce the funding requirement in the golden years. To promote greater self-dependence, senior citizens who are employed beyond the retirement age and any extension thereof, may be given tax exemption where chargeable income arising from employment does not exceed RM35,000. The maximum tax forgone by the Government would be RM1,525 per individual but the amount arising towards retirement funding and alleviation of dependence on others would be disproportionately larger at RM55,000.
If future generations and ultimately the Government are to be spared the burden of bearing the cost of venerable citizens, it is apparent that much more remains to be achieved currently by the Government and the rakyat to preserve the shine of those golden years and the above measures will be of assistance.
By RONNIE LIM and YEE WING PENG
Ronnie Lim was Deloitte Malaysia's country tax leader. Having transitioned this leadership role to Yee Wing Peng earlier this year, Ronnie continues with the firm as advisor. He can empathise with senior citizens and advocates adequate retirement planning.
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