7B.7 The PRS Default Option and Tax Incentives for Members and Employers

FIMM Combined Examination FCE

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1 Introduction: The FIMM Combined Examination (FCE)

0.1 FCE Exam Facts, Registration Rules and How to Use This Guide

2 Chapter 1: Understanding Collective Investment Schemes in Malaysia

1.1 What a Collective Investment Scheme Is and How Malaysian CIS Are Classified 1.2 Investment-Linked Funds Are Not UTS; Industry Growth and History 1.3 Participants in the CIS Ecosystem: Unit Holders, Managers, Trustees, Distributors and Regulators

3 Chapter 2: Introduction to UTS and PRS

2.1 UTS and PRS as Investments: Mechanics, Unit Calculations and How They Compare 2.2 Types of Funds: By Asset Class, Fund Structure and Investment Objective 2.3 Methods of Investing and Dollar Cost Averaging 2.4 Benefits and Disadvantages of Investing in UTS and PRS 2.5 Understanding Risk and the Risks of Investing in Schemes 2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council

4 Chapter 3: Regulatory Framework

3.1 The Regulatory Framework: The SC, Other Regulators and FIMM's Dual Role 3.2 Legislation, SC Guidelines and FIMM Rules Governing UTS and PRS 3.3 Regulation of Scheme Providers and Oversight Functions 3.4 The Deed, the Prospectus or Disclosure Document, and the Product Highlights Sheet 3.5 Portfolio Constraints: Permitted Investments, Liquidity, Borrowing and Exposure Limits 3.6 Regulations for Other CIS: Real Estate Investment Trusts and Exchange-Traded Funds 3.7 Regulation and Duties of the Scheme Trustee 3.8 Regulation of Marketing and Distribution: Distributor Categories, Collection Points and Agency Structure 3.9 Registration of Consultants: Eligibility, Fit and Proper, Duration, Variation and Revocation

5 Chapter 4 (Part 1): Marketing and Distribution — Disclosure and Transactions

4.1 Servicing Investors and the Contents of the Prospectus and Disclosure Document 4.2 The Product Highlights Sheet, Advertising Standards and Account Maintenance 4.3 The Purchase Process and Suitability Assessment Before Personal Advice 4.4 Cooling-Off Rights, Repurchase of Units, Suspension and Switching 4.5 Financing the Purchase of UTS: Process, Safeguards and the Risk Disclosure Statement 4.6 EPF Transfers and Withdrawals for Investment in Approved Unit Trust Funds

6 Chapter 4 (Part 2): Marketing and Distribution — Distributions, Reporting and Service

4.7 Distributable Income, Distributions and NAV, "Buying" a Distribution and Taxation 4.8 Reporting to Investors: Confirmations, Statements, and Semi-Annual and Annual Reports 4.9 Marketing Principles, Delivering Quality Service and Handling Complaints 4.10 The Effect of Inflation, Taxation and Investment Costs on Returns 4.11 Investment Alternatives to UTS and PRS

7 Chapter 5: Code of Ethics

5.1 Compliance, Ethics and the Structure of the FIMM Code of Ethics 5.2 Core Principle 1: Honesty and Integrity 5.3 Core Principle 2: Professionalism 5.4 Core Principles 3 to 5 and Non-Compliance: Conflicts, Disclosure, Confidentiality and Misconduct

8 Chapter 6: Personal Financial Planning

6.1 Personal Financial Planning: Definition, Features, Five Areas and the Six Steps 6.2 Financial Planner Credentials, Skills, Remuneration, and How a Planner Differs from a Consultant 6.3 The Consultant's Role in Investment Planning and Advising Clients Through the Life Cycle

9 Chapter 7A: Features and Operations of UTS

7A.1 Structure of a UTS, the Trust Deed, the Parties and Modifying the Deed 7A.2 UTS Fees, Charges and Expenses, and the Management Expense Ratio 7A.3 Dealing in Units, Valuation, NAV Calculation and Unit Prices 7A.4 Forward and Historical Pricing, and the UTMC's Holding of Units 7A.5 Unit Splits, Distributions and Their Effect on NAV 7A.6 Measuring UTS Performance: Returns, Performance Tables, Risk Measures and Qualitative Factors 7A.7 Operational Aspects of Shariah-Compliant UTS and PRS and the Shariah Contracts Between the Parties 7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing

10 Chapter 7B (Part 1): The Pension Landscape and the PRS Framework

7B.1 The Malaysian Pension Landscape and the Adequacy of Retirement Savings 7B.2 The World Bank's Five-Pillar Pension Framework in the Malaysian Context 7B.3 Key Players: EPF, KWAP, LTAT, Employer-Sponsored Schemes and Annuities 7B.4 Why Malaysia Needs PRS: Ageing, Longevity Risk and the Benefits of PRS 7B.5 The PRS Framework and the Private Pension Administrator (PPA) 7B.6 PRS Structure, the Trust and Deed, Advantages over Other Products, Eligibility and Contributions

11 Chapter 7B (Part 2): PRS Operations

7B.7 The PRS Default Option and Tax Incentives for Members and Employers 7B.8 The PRS Account Structure (Sub-Accounts A and B) and Vesting 7B.9 PRS Withdrawals: Pre-Retirement, Retirement, Permanent Departure, Incapacity and Death 7B.10 Switching Between Funds and Transferring Between PRS Providers (Portability) 7B.11 Unclaimed Monies, Death of a Member and PRS Nomination 7B.12 PRS Funds: Number, Core and Non-Core Funds, Objectives, Risk Profiles, Asset Classes, Authorisation and Naming 7B.13 PRS Fees, Charges and Expenses 7B.14 PRS Unit Creation, Forward Pricing, Valuation, Distributions, Performance Measurement and Electronic Communication

7B.7 The PRS Default Option and Tax Incentives for Members and Employers

Key Takeaways Explain This Topic AI

Under the PRS default option, members below 45 are allocated to the growth fund, members aged 45 to 54 to the moderate fund, and members aged 55 and above to the conservative fund.

A PRS Provider must notify a default-option member one month before age 45 or 55 that the core fund holding will be switched, including general investment advice and outlook.

Default-option switching at the Switch-in Date is executed in equal proportions over five years, with the first switch on the Switch-in Date and the rest within 10 business days of each anniversary.

Individuals can claim PRS tax relief of up to RM3,000 a year for years of assessment 2012 to 2030.

Employers contributing to PRS for employees can claim a tax deduction capped at 19% of the employee's remuneration, including mandatory EPF contributions.

Last updated: October 2026

When the Default Option Applies

The default option applies when a member chooses a PRS Provider but does not choose a fund . A common case: an employer contributes for an employee who has not selected a fund. The contribution is allocated automatically by the member's age .

Before that, the PRS Provider must carry out due diligence on behalf of the PPA: establish the member's full and true identity , verify identification documents where required, and establish the member's financial position, investment experience and investment objectives .

The Three Core Funds

Member's age Core fund Investment approach Volatility the member is assumed to tolerate
Below 45 Growth fund Grow the portfolio High
45 to 54 Moderate fund Grow the portfolio while seeking income Moderate
55 and above Conservative fund Generate consistent income for use or decumulation Minimal

The age bands follow a life-cycle approach : younger members have time to recover from market falls, while members near or past 55 are moving from accumulation to decumulation and cannot afford to sit out volatile cycles.

A member may actively choose any core fund even if it does not match their age.

If a member makes a first contribution within a month before turning 45 or 55 , the provider must allocate it to the moderate or conservative fund respectively.

When a member is placed in the default option, the provider must tell them within a reasonable time and explain how the default option works.

Switching as the Member Ages

Step Rule

Notice One month before the member turns 45 or 55, the provider must notify the member in writing that their core-fund investment will be switched under the default rules unless the member instructs otherwise ; the notice must include general investment advice and outlook

Switch-in Date Units in the current core fund are redeemed and units in the next core fund bought, starting on the Switch-in Date (the current PRS Guidelines require this before the end of the next calendar month after the birthday)

Phasing The switch is executed in equal proportions over five years , based on the units remaining: the first switch on the Switch-in Date and the next four within 10 business days of each anniversary

Example: Puan Mei turns 45 holding 10,000 units in the growth fund and stays in the default option. At the Switch-in Date one-fifth of her remaining growth units (2,000) is switched to the moderate fund. On each of the next four anniversaries a further equal portion of the remaining units is switched, so after five years she is fully in the moderate fund. The phasing avoids moving everything at one market price.

Is the Default Option Right for Everyone?

No. The study guide warns that the age-based default may not suit every member : some young investors are risk-averse and prefer bonds, and some older investors want more growth. The PRS Consultant should assess each member's objectives and risk tolerance, explain the volatility of each fund and confirm the member is comfortable before recommending the core funds.

Tax Incentives for PRS

Who Incentive

Individual members Personal tax relief of up to RM3,000 a year on contributions, available from year of assessment 2012 to 2030 ; it can cover contributions to more than one PRS

Employers A tax deduction for contributions made for employees, on top of mandatory EPF, with the combined deduction capped at 19% of the employee's remuneration

The funds PRS funds are exempt from tax on interest income (FIMM describes PRS fund income as tax-exempt), which can boost returns compared with non-exempt funds

Distributions Distributions paid as units and reinvested in the PRS are not liable to tax, according to the FCE study guide

What the relief is worth

Relief reduces taxable income , not tax payable ringgit for ringgit. The saving equals the contribution relieved multiplied by the member's marginal tax rate . A member who contributes RM3,000 and pays tax at an illustrative marginal rate of 11% saves about RM330 in tax; at 24% the saving would be RM720. The PPA's website has the latest rules.

The flip side is the 8% tax penalty on most pre-retirement withdrawals from sub-account B (section 7B.9), which recovers part of the incentive if money leaves the scheme early.