Private Retirement Scheme (PRS) Versus a Low-Cost ETF: Can Tax Relief Offset the Costs and Restricted Access?

Who this is for

This article is for a Malaysian investor who already understands how to use an investment platform and wants to compare a PRS fund with a low-cost ETF.

If your emergency savings are inadequate, you do not understand market risk, or you may need the money soon, the long-term return calculation is not yet the first priority.

PRS versus ETF calculator

The live page should allow readers to enter:

• contribution or investment amount;
• actual PRS sales charge;
• assumed annual PRS return after ongoing costs;
• assumed annual ETF return after ongoing costs;
• marginal tax rate;
• holding period;
• whether the tax reduction is invested; and
• the after-cost return assumed for that reinvestment.

Show three separate results: projected PRS account value, projected value of the reinvested tax reduction, and projected ETF value. Every result must say “illustration only, not a forecast”.

Key takeaways

• PRS tax relief reduces chargeable income. It is not an investment return earned by the fund.
• A tax saving that is spent does not compound for retirement.
• Use the actual fund, unit class and channel costs. Not all PRS funds charge the same fees.
• A low ETF management fee is not the entire cost. Trading, platform, spread, currency and tax costs may also apply.
• Compare similar assets with consistent return assumptions. Do not compare a Conservative PRS fund directly with a global equity ETF.
• Restricted access is a cost for some people and a useful commitment device for others.

Make the two choices perform the same job

A common mistake is to compare the past return of a Conservative PRS fund with an equity ETF and announce a winner.

Align the following first:

If these do not match, you are comparing different risks rather than two ways of holding a similar investment.

An auditable 20-year example

The following assumptions are for education only. They do not describe an actual fund or predict future returns:

• RM3,000 invested once;
• 20-year holding period;
• PRS sales charge of 3%, leaving RM2,910 initially invested;
• PRS return after ongoing costs of 4.9% a year;
• ETF return after ongoing costs of 5.6% a year;
• the PRS tax reduction is fully invested into the ETF and also earns 5.6%; and
• no other trading, currency, tax or withdrawal costs.

After 20 years, the ETF illustration is about RM8,921. The PRS account itself is about RM7,576. Add the projected value of the invested tax saving:

Under this exact set of assumptions, the mathematical break-even marginal tax rate is about 15.1%.

That is not a Malaysian tax recommendation and not a universal PRS threshold. Change any assumption and the answer changes:

• A zero PRS sales charge lowers the break-even point.
• A larger annual cost difference raises it.
• Spending the tax saving weakens the retirement result from PRS.
• Different return paths produce different final values.

What happened to the tax saving?

Many comparisons place RM330 or RM570 on paper and implicitly assume it remains part of the retirement plan.

There are at least three possible outcomes:

1. You spend it. It helps this year's cash flow but does not compound.
2. You keep it as cash. It may provide useful reserves but has a different expected return.
3. You invest it. Only then can its future value be placed beside the ETF balance in a long-term comparison.

“PRS reduced my tax” and “PRS increased my retirement assets” are not the same statement.

How a small annual fee difference compounds

Suppose both investments earn 6% before costs. One has annual costs of 0.4% and the other 1.1%, producing simplified after-cost returns of 5.6% and 4.9%.

A gap of 0.7 percentage point looks small in one year. It compounds for 20 years. You cannot offset only the first year's fee with the first year's tax saving and assume the calculation is settled forever.

At the same time, do not use a website's maximum sales charge as if it were the exact amount everyone pays. Check the provider, unit class and distribution channel.

An ETF has more than one cost too

A low-cost ETF may still involve:

• brokerage commission and platform fees;
• the bid-ask spread;
• foreign-exchange spread;
• custody or account fees;
• dividend withholding tax;
• fund-domicile and estate-planning issues; and
• the behavioural cost of frequent trading.

These vary by platform, market, fund domicile and investor. Do not omit them to make an ETF appear free. Do not exaggerate them to promote PRS either.

Liquidity is not free

PRS contributions are generally split 70% into Sub-account A and 30% into Sub-account B. Before age 55, a general early withdrawal comes only from Sub-account B and is subject to current timing, frequency and 8% tax-penalty conditions.

An ETF can usually be sold while its market is open. That does not mean it can be sold without loss. You may need cash during a market decline, and trading or currency costs may apply.

Greater liquidity has value. Restricted access may also help someone who tends to spend long-term savings. This trade-off does not fit neatly into one projected return.

When PRS may deserve more attention

PRS may compare more favourably when multiple conditions are true at the same time:

• you can use some or all of the tax relief;
• you found a suitable fund and unit class with reasonable costs;
• the money can remain for retirement;
• the tax saving will be saved or invested;
• PRS has a clear role beside EPF and other investments; and
• the restriction helps your saving discipline.

When an ETF may deserve more attention

A low-cost ETF may compare more favourably when:

• PRS gives you little or no tax reduction;
• you need greater access to the money;
• you can invest consistently at low cost;
• you understand trading, currency, tax and estate issues;
• the desired exposure is simpler and more transparent through the ETF; and
• the ability to sell will not tempt you to trade emotionally.

Henry's view

I do not see PRS and ETFs as a contest where only one can survive.

PRS is an investment framework with retirement withdrawal rules and a possible tax benefit. An ETF is a fund structure traded on an exchange. They are not the same layer of the decision.

I care more about whether we compared similar asset risks, included all costs, tracked what happened to the tax saving, and allowed for the person's need for cash.

If someone uses “PRS has tax relief” to ignore a costly or unsuitable fund, I disagree. If someone chooses a cheap ETF but sells every time the market falls, the low fee will not repair that behaviour.

My conclusion changes with the actual unit class, tax rate, holding period, cash needs and investment discipline. Put those numbers into the model before taking sides.

Common mistakes

• Comparing past returns from different asset risks.
• Renaming a tax reduction as investment return.
• Assuming the tax saving will automatically be invested.
• Checking the PRS sales charge but ignoring annual costs.
• Checking the ETF management fee but ignoring trading, currency and tax costs.
• Ignoring a possible need for the money before 55.
• Using an average return assumption to hide real volatility.

Next step

Confirm the PRS fund's exact unit class and costs. List the ETF's full costs from the platform. Then compare similar asset exposures over at least 10 and 20 years under a range of tax-rate scenarios.

This article is for general education. It is not a recommendation of any PRS fund, ETF, platform or investment strategy. The figures are illustrations, not forecasts.