The problem with lump sum withdrawals

FMT takes a closer look at why Malaysians are running out of their EPF savings so quickly and what lessons global pension systems can offer.

Many senior citizens risk running out of funds after retirement, making it essential for reforms in the pension system.

PETALING JAYA:

 For most Malaysians, retirement brings a crucial question: What should they do with their Employees Provident Fund (EPF) savings? For the overwhelming majority, the answer is to withdraw it all in one go.

However, this lump sum approach has a costly downside. Many burn through their funds within the first few years of retirement.

The bigger challenge, though, is that Malaysians are living longer, which means retirement funds need to stretch across decades rather than just years.

FMT takes a closer look at why Malaysian retirees are running out of their EPF savings so quickly and what lessons global pension systems can offer.

Malaysia’s lump sum culture 

Under the current EPF model, members can withdraw their full savings in a single lump sum at 55 or 60.

Nearly 97% choose this option, despite most retiring with under RM50,000, a sum that would be depleted in just over four years at RM1,000 a month.

Financial planner V Rajendaran said most retirees exhaust their EPF savings within three to five years due to the loss of the “paycheque effect” as well as a lack of income discipline and financial literacy.

Rajendaran said retirees risk overspending or making poor investment choices without a structured payout system in place.

“This lump-sum culture not only accelerates depletion, it leaves retirees vulnerable to poverty in their later years,” he added.

Longer lives, higher costs 

Malaysia’s life expectancy has risen to about 76 years, but with many retirees now living 20 years or more after leaving the workforce, their savings are failing to keep up.

Economist Madeline Berma, who was then a senior fellow at Institut Masa Depan Malaysia, said this gap is made worse by the rising cost of living, which has pushed many to dip into their retirement funds long before they should.

“Repeated withdrawals, including through the new Flexible Account, show that people are relying on EPF savings to cope with daily expenses,” the late Berma told FMT in August.

Under the EPF’s restructuring in May 2024, contributions are now split into three accounts: Retirement account or Account 1 (75%), Wellbeing account (15%), and Flexible account (10%).

Account 3, or the Flexible account, enables contributors to withdraw at any time in a move aimed at providing contributors easier access to their pension funds, especially during emergencies.

During the pandemic, the government allowed special withdrawals under the i-Lestari, i-Sinar, and i-Citra schemes. More than RM145 billion was taken out by over 7.3 million members to offset job losses and income cuts.

Berma noted that while these withdrawals provided short-term relief, they may leave retirees with dangerously low balances.

“The combination of longer lifespans, higher costs and lump sum withdrawals will only worsen the problem,” she said.

What other countries do

Lump sums give retirees control over their money, but the trade-off is stark: Full flexibility often results in inadequate protection against poverty in old age.

Other nations have addressed this issue through default rules such as mandatory annuitisation or scheduled payouts that still allow some choice but set guardrails for sustainability.

Singapore’s CPF LIFE automatically converts a portion of retirement savings into lifelong monthly payouts starting at age 65. There is no full cash-out option, effectively protecting retirees from exhausting their funds too soon.

Germany’s statutory pension is an earnings-based, pay-as-you-go system with no lump sum withdrawals, only predictable monthly benefits for life.

Sweden’s notional defined contribution (NDC) system records contributions in notional accounts but adjusts payouts for rising life expectancy, ensuring sustainability without compromising fairness.

The UK’s flexible drawdown model embeds safeguards, requiring financial guidance to encourage sustainable withdrawal rates.

Possible ways forward 

Rajendaran said Malaysia could mandate partial annuitisation by requiring a portion of EPF savings to be channelled into monthly payouts to cover basic living needs, while still allowing some lump-sum withdrawals for flexibility.

He also suggested introducing a universal pension floor, a non-contributory basic pension for all elderly Malaysians regardless of their EPF balance, to safeguard against poverty in old age.

“The EPF could expand its own products, such as i-Lindung, into more robust annuity-like solutions that guarantee income for life.

“Equally important is pre-retirement counselling and awareness campaigns, particularly for the B40 and informal sectors, so Malaysians understand longevity risks and the need for sustainable planning,” he added.

A pension problem past due 

The lump sum withdrawal culture is deeply ingrained in Malaysia’s retirement landscape. As lifespans lengthen and savings dwindle, such a culture is becoming increasingly unsustainable.

Global examples show that structured payouts and annuitisation are not about restricting choice but about protecting retirees from running out of money when they need it most.

Strengthening Malaysia’s pension system requires tackling the lump sum dilemma and putting sustainable income and not one-off withdrawals at the core of reform. - FMT