What happened when a country let everyone draw cash from their pension

Malaysians relied on their pensions as ‘cash machines’ during Covid

 “The withdrawals option is not one that should be followed, nor is it one that Malaysia is likely to repeat.”

Noah Eastwood
Fri, 16 February 2024 



When the pandemic hit, and the world shut down, Malaysians were largely left to fend for themselves.

With no furlough scheme and limited help from the government, they were forced to dig into their savings to survive. Many raided their pension pots, after the rules were made more flexible to allow people of any age to withdraw money to survive lockdowns.

They took out billions of pounds, using their pension as a cash machine. Now, Malaysians teeter on the brink of disaster. Many have exhausted their retirement savings and now face living out old age in poverty.

This loosening of pension rules is exactly what think tank the Resolution Foundation recently called for in a major new report.

It argued that British savers should be allowed to borrow from their pensions to weather financial hardship – an idea that will appeal to lawmakers who are concerned about Britons’ low household savings and who want to reduce reliance on benefits.

Over £114bn has accrued in workers’ pension pots since automatic enrolment came into force 10 years ago, according to official figures, suggesting a healthy balance sheet for a future government to play with.

But while schemes in America and South Africa, which allow cash withdrawals for any reason and loans to be secured against lifetime savings, have largely been successful, increasing pension flexibility in Malaysia has left the nation grappling with a retirement crisis.

A flexible pension pot

On paper, Malaysia has one of the best state-run pension schemes in the developing world.

Workers put in 11pc of their salary and employers more than match it, making defined contributions of at least 12pc. It is also considerably more flexible than those of many higher income countries.

The “two pot” system has a second account, worth just under a third of the total, which can be used to buy a house or pay for education and medical expenses. The rest is locked away until it can be drawn down at age 55.

During the pandemic, millions of Malaysians were permitted to make four rounds of cash withdrawals from their pensions, totalling RM145bn (£24bn).

The Employees Provident Fund (EPF), the main Malaysian retirement fund for private sector employees, saw total assets dip 15pc after more than eight million savers made withdrawals to survive the financial shock of lockdown.

With each round of pension raids the public demanded more, amid limited direct government support.

Now, millions face being unable to afford to retire. The median savings in EPF accounts for all Malaysians fell by approximately 50pc from 2019 to 2022, when they stood at just RM8,100 (£1,347).

It means retirement savings for around half of savers will provide a monthly income well below the nation’s poverty line, with only the wealthiest 2pc having enough for a comfortable retirement, according to EPF figures. And unlike the UK, there is no equivalent state pension.

‘A recipe for disaster’

Geoffrey Williams, an economist at the Malaysian Institute for Economic Research, said that the failure of Malaysia’s experiment with super-flexible pensions should serve as a warning to other countries.

He said: “The example from Malaysia shows that withdrawals from pension funds leads to widespread pensions inadequacy and old-age poverty. At best it requires full-scale evaluation; at worst, it is prima facie a recipe for disaster.

“For reasons of choice for housing or education or for factors outside people’s control like illness, public health crises or unemployment the option to raid your pension becomes too compelling and funds withdrawn are almost never replenished.

“This has caused millions of people in Malaysia to have nothing saved for retirement and no state pension to fall back on.

“In the UK, it would likely lead to millions having inadequate savings and becoming reliant on the state pension and benefits with obvious implications for government spending, borrowing and higher taxes.

He added: “The withdrawals option is not one that should be followed, nor is it one that Malaysia is likely to repeat.”

The Malaysian government has since restructured EPF, adding a third account to limit instant withdrawals to only smaller payments, while major reforms to the nation’s savings could be needed in the future to guarantee an above-poverty line income to the poorest retirees.

Even before the pandemic, Malaysia’s two pot pensions, designed to help savers cover the costs of essentials during their working life, were severely depleted, in part due to an over reliance of the withdrawal feature for housing and other expenses.

In 2019, over 50pc of those with one year left to work before retirement had less than RM50,000 (£8,323) or just RM200 (£33) per month for retirement, meaning they likely will need to work well into later life.

A similar scheme in the UK would benefit from the safety net of the state pension system, a guarantee Malaysia does not have, but could see more savers relying on this income if they use up private savings while working and fail to replenish them.

As many as one in three working age people in the UK live in families with less than £1,000 in savings, leaving them unprepared for sudden financial hardship, according to the Resolution Foundation’s research.

The think tank’s report calls for savers to be able to have a “borrowable” fund in their pensions, of £15,000 or 20pc of their pot, whichever is lower, to be paid back across with interest over a period of several years. It would essentially give every worker a “rainy day” fund to fall back on.

Under the UK’s current rules, an individual accessing their pension pot before the age of 55 (rising to 57 by 2028), unless they are terminally ill, will incur a tax charge of up to 55pc.

Australia also created a pension cash-out scheme during the pandemic, which allowed millions of typically young workers to cash out AUD36.4 billion (£17.6bn) from their pensions early to cushion financial hardship.