When is it okay to utilise EPF’s Special Withdrawal facility?

With applications for the Employees Provident Fund (EPF) Special Withdrawal facility now open to all members below the age of 55, EPF members are now allowed to take out up to RM10,000 from their EPF savings account.

The Special Withdrawal facility was introduced with hopes of providing some financial relief to those who are struggling from the after effects of the pandemic and the floods. However, many have voiced their disapproval of this, stating that the withdrawals could lead to a retirement crisis.

Now that you can begin applying for the withdrawal, make sure you make an informed decision before doing so. Luckily for you, we’ve compiled a list of pros and cons of utilising the Special Withdrawal facility for you to make the best decision!

Before that, is it advisable to withdraw funds from your EPF account?

In general, it is not advisable to withdraw money early from your EPF account. When entering retirement, every cent counts and a penny saved is always a penny earned. However, in some cases, an early withdrawal from your EPF account may serve as a viable strategy.

However, in our opinion, it is okay to apply for the Special Withdrawal facility if the money will really help you and your family out. In fact, it could even be a lifeline for many Malaysians.

Nevertheless, it is important to remember that the RM10,000 should only be taken out from your EPF account if you’re able to budget and plan out your purchases wisely. There is no point in withdrawing the funds if you’re only going to be using it for an irresponsible purchase.

There are some situations in which it can be advisable to make use of the Special Withdrawal facility

1. Loan repayment

It may be beneficial to cash out the RM10,000 if you have a loan that has a very high interest or a hefty credit card bill. By lending money from the bank, you will gain access to finances that may help you now, but you will also be presented with a set repayment schedule - usually with interest - for the future. If you’re unable to pay this off, you’ll be taking a hit on your credit score, which will affect your chances of getting approved for a loan. In this case, you may be financially better off withdrawing funds from your EPF account than continuing to pay that interest.

2. Financial hardship

With unemployment, unpaid leaves, salary cuts, and reduced business arising from the pandemic, tackling cash flow issues is still a major problem for many Malaysians. Therefore, the Special Withdrawal facility would be an extremely valuable solution for those who haven’t been able to secure a steady income just yet. While it won’t address their long term needs, gaining access to a large amount of cash upfront would at least help them stay afloat.

Also, if you’ve exhausted what’s left of your emergency funds due to the pandemic, cashing out funds from your EPF account would help replenish it.

3. Investments

Applying for the withdrawal could be a good idea if you’re planning to use the cash to grow your wealth. With different robo-advisors and investment plans available to the public, you could kickstart your investment journey safely and securely. Furthermore, you would be able to determine your own personal risk appetite before moving forward with any investments.

The funds could also be used as capital for the business plan you have to start earning a more stable income. Though the maximum amount you can withdraw through the special withdrawal facility is only RM10,000, it would at least give your business a start and provide a clearer path for your future.

4. Help outside of targeted repayment assistance

Though targeted repayment assistance like electricity bill discounts and payment deferments are helpful, these measures cannot be expected to fully ease one’s financial burden. Necessary expenditures, such as rent, groceries, and transportation cannot be deferred through any form of assistance and would still weigh heavily on the shoulders of those who are struggling, so this is where the Special Withdrawal facility comes in.

Why cashing out the RM10,000 might not be such a good idea

1. Lack of financial literacy

As the Special Withdrawal facility’s eligibility criteria is pretty flexible, you do not have any restrictions as to how you chose to use the funds you withdraw. However, this flexibility could be a blessing and a curse to those who lack financial discipline and literacy as they could be easily swayed into making an irresponsible purchase.

With the amount of unethical advice encouraging EPF members to withdraw from their accounts to purchase luxuries circulating the internet, the main concern lies in those who only think of their short term wants instead of their basic expenses and retirement goals.

2. You’ll be forgoing your compounding interest

Compulsive shopping aside, one thing that many are concerned about when it comes to withdrawing money from their EPF account is the compounding interest that they will be giving up. Compounding interest is the money you can make from your initial deposit and the interest earned from that principal deposit, both of which increase over time. Hence, when you withdraw funds from your EPF account, you will be losing out on the returns that could’ve earned on your EPF contributions, as well as the extra returns you would have gained from your accumulated returns.

When you take the effects of compounding interest into consideration, you will not just be losing out on the RM10,000 that you’ve withdrawn through the Special Withdrawal facility. Taking the minimum guaranteed 2.5% p.a. EPF dividend yield as example, your RM10,000 would have been compounded into a hefty sum of RM18,539.44 over the next 25 years! Thus, we would advise you to think extremely carefully before making your decision.

3. It poses a risk to your retirement plans

While we understand that you might need a sizable amount of cash now, it is worth noting that you will end up with less retirement savings if you withdraw funds though the Special Withdrawal facility. Therefore, the withdrawal should be a last resort for those who still have the means to live comfortably.

If you’re at the age where you’re starting to plan your retirement, it’s important to make sure you have enough funds for a comfortable retirement, with or without the Special Withdrawal facility.

To conclude…

Like everything else in life, there is no black and white to this, so there is no definite answer as to whether you should make use of the Special Withdrawal facility or not. If you find yourself in a tight financial situation, withdrawing the funds would then be the rational thing to do. However, if you think you could ride through the financial storm by making some adjustments to your lifestyle instead, we would advise you to keep your retirement savings where they are and reap those compounding measures.

If you’re worried about ruining your chances of retirement by making use of the Special Withdrawal facility, fret not because you can still contribute funds to your EPF account on your own.

What do you think about the special withdrawal? Will you be applying for it? If yes, here’s our step-by-step guide to doing so!