Posted on Oct 11, 2011 by Sergio Ulloa
A new tax break and incentive scheme introduced by the Malaysian government for their 2012 budget could work to encourage more Malaysians to purchase protection products and boost the local insurance industry.
The Malaysian Prime Minister and Minister of Finance, Datuk Seri Najib Tun Abdul Razak, tabled the government's MYR232.8 billion (US$73.7 billion) budget for 2012 to Parliament on October 7th 2011. The national budget features a slew of new government initiatives designed to grow per capita income, improve productivity and combat rising global food and fuel prices, all with the aim of pushing Malaysia towards its long-term goal of becoming a developed and high income economy by 2020.
The Prime Minister explained that while the Malaysian economy is expected to continue growing at between 5 percent and 5.5 percent of gross domestic product (GDP) though 2011, persistent weak global economic forecasts for next year will present significant challenges. Malaysia's government thus intend to implement measures that they believe can stimulate domestic economic activity through public and private sector investment and consumption. The 2012 budget focuses on low and middle income earners in Malaysia
, and in particular civil servants, with over MYR51.2 billion (US$16.2 billion) allocated towards development spending, including poverty reduction, education programs, healthcare, housing, cash payouts and more. The federal government's total revenue is meanwhile expected to grow by 2 percent to MYR186.9 billion (US$58.9 billion) in 2012, compared with MYR183.4 billion (US$58 billion) in 2011. Despite increasing the outlay for public spending, the government's budget deficit in 2012 is expected to narrow to 4.7 percent of GDP, compared with 5.4 percent this year.
Amongst the Malaysian government's budgetary initiatives are important pension revisions and tax rebates which could benefit the local insurance industry
and educate more Malaysians about the value of cover. The 2012 budget contains a new tax rebate of up to MYR3,000 (US$950) on net contributions made to the newly established Private Retirement Scheme (PRS) or a private insurance annuity for up to 10 years. Previously there had been no incentives for private sector workers or the self-employed in Malaysia to contribute to the Employees Provident Fund (EPF), the country's compulsory savings plan. Going forward this means that Malaysian taxpayers will be able to buy an annuity or contribute to the PRS, with a MYR3,000 (US$950) tax relief on premiums, a significant amount for many Malaysian workers. Employers' contributions to the PRS for their employees will also made be tax deductible, with a 19 percent cap on employee remuneration, in addition to full tax exemption on income from the Private Retirement Fund. The retirement age for public sector employees has also been lifted from 58 to 60, giving workers more time to accumulate savings.
The government has initiated these proposals to protect the welfare of retirees and guarantee that workers who reach retirement age are able to continue living a moderately comfortable life without over-relying on their EPF savings. At present, many Malaysians find themselves unable to accumulate sufficient savings to bear the cost of living upon retiring. It is estimated that 70 percent of all retirees in Malaysia have used up all their savings within the first 10 years of their retirement. This retiree crisis puts undue pressure on public services and future generations of workers who must somehow find a way to accommodate scores of broke pensioners.
The Life Insurance Association of Malaysia (LIAM) has heralded the new pension incentives as a good start by the federal government in recognizing the growing need for suitable retirement planning in Malaysia. "The introduction of the Private Retirement Scheme will ensure that people who retire will be able to live without over-relying on their Employees Provident Fund savings. As statistics have shown, the life span of average Malaysians are getting longer, thus astute retirement planning at an early age would be a step in the right direction," LIAM said in a press statement on Friday.
The LIAM insisted however that more work could be done in increasing the number and type insurance policies made available to people seeking long-term risk cover at affordable prices. LIAM expressed disappointment that the MYR6,000 (US$1900) tax rebate for life insurance premiums paid by individuals is still combined with EPF contribution. Annuity funds have proven to be both a more efficient retirement planning tool but they remain subject to a 8 percent tax on investment income in Malaysia while the PRS scheme (a lump sum system) remains tax free. LIAM hopes that the government will work to address this, remove discriminatory taxation, and enable Malaysians to consider a more efficient pension scheme.
"The tax relief of RM3,000 accorded to insurance annuity shows that the government recognises the importance of insurance annuity, as lump sum has been proven to be an ineffective way for retirement planning, exhausting too early while not addressing longevity risk. But while the tax exemption on investment income of Private Retirement Fund is given, so as not to erode the accumulation of the fund, it's unfortunate that the same is not accorded to insurance annuity," LIAM commented.
In addition to these numerous initiatives planned for the 2012 Budget, including the private pension plan and worker insurance scheme, LIAM maintain that economic conditions in Malaysia are ripe for further life insurance development. Around 45 percent of the Malaysian population currently has life insurance, according to the LIAM, up from 42 percent by the end of 2010 This level of life-insurance penetration is low by a developed economy's standards and will be an important factor in the further growth of the sector. The current low interest rate environment will act as an impetus to consumers seeking high-yielding products like insurance in Malaysia.