Wednesday, November 4, 2009

EPF Interest Calculation - Pro Rated

EPF's interest calculation is one of the weird ones. Somehow they don't use the straight forward FV formula. Although it may seems like they are stupid and don't know math but the actual reasons are;

1) They don't really know how much to pay you until after financial closing at year end
2) your employer may submit your contribution to EPF LATE
3) legacy system left over from British colony time

In short, EPF interest calculation is pro rated. So

1) Whatever you have left last year will enjoy full interest payment this year.
ie. $100,000 x 4% = $4,000

2) Amount you save on 1st month will enjoy 11 month interest, 2nd month will enjoy 10 months interest etc.
ie. in January $100 x 4% x 11 / 12
ie. in February $100 x 4% x 10 / 12

The exact words from KWSP

»How is the EPF dividend calculated?
In order to determine the dividend rate, factors that need to be taken into consideration include net income and total for 1% dividend at year-end.

For example:

Dividend Rate = Net income (a) x 1% Total for a 1% dividend (b)

  • Investment income + Non-investment income - Expenses
  • Total for a 1% dividend is based on:
    • Opening balance of contribution (after withdrawal) that obtain dividend for a 12-month period, and
    • Monthly contribution that obtain pro rated dividend i.e. dividend for the n-month will get (12-n) month dividend. For example, the September contribution (n=9) will obtain a 3 months dividend.
Under Section 27 of the EPF Act 1991, the guaranteed minimum dividend rate is 2.5% per
year on members' savings.

Example Calculation based on this article : MYR300 FREE Money

This document can be found here

There are many EPF calculation tools online. Unfortunately, none of them will show the same figures. So above calculation is actually different than what some of the banks web site will tell you. Even the EPF web site itself will show different figures than the banks and this article. However, this calculation method posted here, has been shown to KWSP HQ 2 years ago and the officers confirm correctness.

So treat this as one of the ways to calculate EPF interest, not the absolute correct and only way. I have seen 2 person EPF return calculated differently. After reporting to KWSP, they simply pick the lower payout methods without much justification. Since then, we do not report inconsistency in their calculation anymore unless it is LESS than what we should get.