
Every country has a retirement or pension system put in place to ensure its citizens have enough savings for retirement. If you take a look at your monthly salary payslip, you would have noticed that a percentage of your salary goes to the Employee Provident Fund (EPF). In Malaysia, you are required to contribute 11% of your monthly salary to the EPF – a retirement savings fund for Malaysians.
These contributions will be credited into your EPF accounts and invested to generate dividends for your retirement. Your EPF savings can be withdrawn once you reach the retirement age of 60. EPF guarantees a minimum dividend rate of 2.5% to its members but has managed to yield a dividend rate of more than 5% since 2009 – which is higher than fixed deposit rates offered by banks. One should also note that EPF investments are exempted by tax.
But how exactly are EPF dividends derived and calculated?
EPF Dividends Are Calculated Based On Daily Aggregate Balances
As a national retirement savings fund, EPF takes our contribution savings and invests in various asset classes to generate revenue and ensure that its members receive a minimum dividend of 2.5% every year.
Sometime around March every year, EPF would announce the dividend rate for the past year. Once the announcement is made, EPF members can check their statement which will reflect the rate and dividends earned.
EPF contributions are divided into two accounts – Account 1 and 2. Out of the contributions, 70% goes into Account 1 and 30% into Account 2. The dividend rates are the same for both accounts.
The dividend earned is calculated based on aggregated daily balances in your account. Rather than multiplying the dividend rate with the total amount in the EPF account, you will have to calculate the dividends earned on the opening balance and dividends earned on monthly balance.
In March 2023, EPF announced that dividend rates for year 2022 were 5.35% for conventional savings and 4.75% for Shariah savings. So, for conventional savings, members will get 5.35% dividend on the opening balance amount as of 1 January 2022 and on aggregated monthly contributions.
Illustration Of Partial EPF Statement
Transaction | Date | Contribution Month | Total (RM) | Savings Balance (RM) | ||
Account 1 | Account 2 | Total | ||||
Opening balance
|
0.00 | 12,715.03 | 5,449.29 | 18,164.32 | ||
Contribution
|
16/01/17
|
Jan-17 | 525.00 | 12,933.43 | 5,542.89 | 18,476.32 |
Contribution
|
20/02/17 | Feb-17 | 525.00 | 13,300.93 | 5,700.39 | 19,001.32 |
Contribution | 20/03/17 | Mar-17 | 525.00 | 13,668.43 | 5,857.89 | 19,526.32 |
Investing In A Diverse Portfolio
EPF dividend rates vary from year to year depending on the performance of its investments. EPF invests in a diverse portfolio that consists of government investment issues, corporate loans, bonds and sukuk, money market funds, as well as property. The mixed portfolio balances between safeguarding the retirement savings and generating dividends above inflation rate.
Based on investment performance, the EPF management committee proposes a dividend rate to the EPF board and if agreed by the board, the rate will be reviewed by the Minister of Finance who will provide the final approval before announcement.
EPF obtains the final dividend payout by deducting management expenses from the total gross income of the year.
Conventional vs Shariah Dividends
EPF members have the choice of either keeping their savings under conventional savings or switch to Shariah savings. Contributions will still be managed in a way to achieve similar investment objectives and strategies.
Under Shariah savings, the money is invested in only ethical investments that are aligned to Islamic principles. For example, Shariah savings are not used to invest in companies that contravene Islamic principles such as making profits on interest, gambling and uncertainty in contracts. So, Shariah investments will have lesser exposure to conventional banking industry where these elements are often present.
It’s important to note that anyone regardless of race or religion can make the choice to switch to Shariah savings.
Calculating Total Dividends Earned
The total dividends you’ve earned are a combination of your annual dividend and monthly dividends. To illustrate calculations of the dividends, we will use the example below.
Transaction | Date | Contribution Month | Total contribution (RM) | Savings Balance (RM) | |
Account 1 | Account 2 | ||||
Opening balance
|
0.00 | 7,000.00 | 3,000.00 | ||
Contribution
|
16/01/22 | Jan-22 | 1,000.00 | 7,000.00 | 3,000.00 |
Contribution | 20/02/22 | Feb-22 | 1,000.00 | 7,700.00 | 3,300.00 |
Contribution | 22/03/22 | Mar-22 | 1,000.00
|
8,400.00 | 3,600.00 |
The opening balance for year 2022 amounts to RM7,000 for Account 1 and RM3,000 for Account 2. The dividend rate for that year is let’s say 5%.
You can peruse the formula below to get the annual dividends:
Opening balance as of 1 January x Dividend rate = Annual compounded dividend
For Account 1:
RM7,000 x 5% = RM350
RM3,000 X 5% = RM150
Total annual dividends = RM500
To calculate monthly dividends, first obtain the aggregate balance. We will be using the same example.
Here’s the formula to get the aggregate balance:
(Monthly opening balance x Days in month) + (Monthly contribution x 1 day) = Aggregate balance
For Account 1:
(RM7,000 x 31) + (RM700 x 1) = RM217,700
Then, you can calculate the monthly dividends with the formula below:
(Aggregate balance x Dividend Rate) / Number of days in the year = Monthly dividend
For Account 1:
(RM217,700 x 5%) / 365 = RM29.82
Monthly Dividends For Account 1 | Balance as of 1st of every month (RM) | Days in the month | Contribution amount (RM) | Dividend amount |
Dividend Jan 22 | 7,000.00 | 31 | 700.00 | 29.82 |
Dividend Feb 22 | 7,700.00 | 28 | 700.00
|
29.63 |
Dividend Mar 22 | 8,400.00 | 31 | 700.00
|
35.77 |
Dividend Apr 22 | 9,100.00 | 30 | 700.00
|
37.49 |
Dividend May 22 | 9,800.00 | 31 | 700.00
|
41.71 |
Dividend Jun 22 | 10,500.00 | 30 | 700.00
|
43.24 |
Dividend Jul 22 | 11,200.00 | 31 | 700.00
|
47.66 |
Dividend Aug 22 | 11,900.00 | 31 | 700.00
|
50.63 |
Dividend Sep 22 | 12,600.00 | 30 | 700.00
|
51.88 |
Dividend Oct 22 | 13,300.00 | 30 | 700.00
|
54.75 |
Dividend Nov 22 | 14,000.00 | 30 | 700.00
|
57.63 |
Dividend Dec 22 | 14,700.00 | 31 | 700.00
|
62.52 |
Total monthly dividends earned in 2022 | 542.73 |
Monthly Dividends For Account 2 | Balance as of 1st of every month (RM) | Days in the month | Contribution amount (RM) | Dividend amount |
Dividend Jan 22 | 3,000.00 | 31 | 300.00 | 12.78 |
Dividend Feb 22 | 3,300.00 | 28 | 300.00
|
12.70 |
Dividend Mar 22 | 3,600.00 | 31 | 300.00
|
15.33 |
Dividend Apr 22 | 3,900.00 | 30 | 300.00
|
16.07 |
Dividend May 22 | 4,200.00 | 31 | 300.00
|
17.88 |
Dividend Jun 22 | 4,500.00 | 30 | 300.00
|
18.53 |
Dividend Jul 22 | 4,800.00 | 31 | 300.00
|
20.42 |
Dividend Aug 22 | 5,100.00 | 31 | 300.00
|
21.70 |
Dividend Sep 22 | 5,400.00 | 30 | 300.00
|
22.23 |
Dividend Oct 22 | 5,700.00 | 30 | 300.00
|
23.47 |
Dividend Nov 22 | 6,000.00 | 30 | 300.00
|
24.70 |
Dividend Dec 22 | 6,300.00 | 31 | 300.00
|
26.80 |
Total monthly dividends earned in 2022 | 232.61 |
After obtaining your annual dividends and monthly dividends, you can calculate your total dividends as follows:
Total annual dividends for both accounts + Total monthly dividends for both accounts = Total dividends earned
(RM350 + RM150) + (RM542.73 + RM232.61) = RM1275.34
Delivering A Dividend Rate Higher Than 2.5% For Over 70 Years
As of March this year, EPF’s investment assets are valued at RM1.04 trillion, making it one of the biggest pension funds in the region. Many Malaysians tend to keep their money in their EPF accounts to enjoy dividends that are higher than what a fixed deposit account offers. There are also tax benefits to contributing to the EPF.
Investing in various asset classes both local and international, EPF’s performance is susceptible to external market forces. EPF portfolio managers follow its Strategic Asset Allocation framework that enhances long-term returns within tolerable risks while having the flexibility to take advantage of market conditions when necessary.
Over the past decades, EPF has consistently delivered dividend rates higher than the required rate of 2.5% since its inception in 1951. It has famously managed to deliver a dividend rate of 4.50% even during the 2008 global financial crisis that was deemed as the worst economic crisis ever while hitting its highest rate at 8.50% in the 1980s.
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