3 Important Purchases You Can’t Afford Not To Make in Your Life

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Whether you are getting married, buying your first home or starting a new job, you will be worried about how this will affect your financial picture. You can perhaps go without that Chanel winter edition bag, or those Nike shoes, or the sleek iPhone 6. Nothing is really going to happen if you do not own them. But, there are some important purchases in life, which you shouldn’t go without. Without them, you could be heading down a visible path of a financial nightmare not only for you, but for your family too.

 

Medical conditions and deaths are never expected. Being covered by insurance helps keep your family financially safe and sound if something happens to you and you become incapable of supporting them financially anymore. If you have a family who depends on your income, then you should consider getting either one of these insurance, if not all.

There are various types of insurance policy that cater to different people. The most common insurance that everyone should get is a medical insurance. With the rising medical inflation — a dialysis session cost at least RM250 today, one serious sickness can cause one to go into bankruptcy, if he or she is not financially secure.

Life insurance is best for those who have dependents, like a stay-at-home spouse and/or school-going children. If you do not have other assets that will protect your dependents in the event of your death or complete loss of income, then life insurance is your best bet. The sum insured is not meant to support your loved ones forever, but to at least give them enough time to pick themselves up and establish a channel of income in your absence. A common rule of thumb is that a life insurance policy should cover up to 7-10 times, the insured individual’s annual income.

Other types of insurance also include personal accident insurance, home insurance, car insurance, and travel insurance.

Once you have purchased an insurance policy, make sure to periodically review your coverage, especially when you have a significant life event (e.g. birth of a child, death of a family member) and make sure that it adequately meets your financial needs.

A common mistake that people make is to be underinsured. For example, if a portion of your insurance proceeds are to be used for your child’s tertiary education, the more children you have, the more insurance coverage you will require. Another common mistake is to be overinsured. The extra money you spend on premiums could be used for other things. That is why it is important for you to get a full financial picture so you can gauge the right amount and the type of coverage that is suitable for your specific needs.

Often, just a few Ringgit a day is all you need to provide your loved ones with plenty of financial protection. There are four basic reasons:

1.    Mortgage protection

Whether you live by yourself, with a spouse or significant other, you may want to buy life insurance as mortgage protection. Think about it − you don't want the person you live with to be homeless if you die unexpectedly, do you?

Term life insurance can be used to pay off an outstanding mortgage balance. Just select a term that matches the length of your mortgage payment period. Some companies even offer decreasing term insurance, which means the death benefit decreases along with your mortgage balance.

2. Income replacement

You and your significant other may have planned for a future based on two incomes − but what if one of you passes away unexpectedly? Life insurance can be used to replace the lost income so the survivor can maintain the same standard of living.

3. Final expenses

You've seen the commercials − funeral expenses, burial costs and medical bills can add up to a hefty amount. The last thing you want is for your loved ones to shoulder this extra burden. Life insurance can be used to plan for these final expenses. Permanent life insurance is available in various amounts, so you can pick a death benefit that meets your needs.

4. College funding

Life insurance can help fund a college education. If you die, the death benefit may be invested and potentially grow to the needed amount by the time your children reach college age. Feel better knowing that you helped prepare for their future – even if you are not there to see it. Just keep in mind that investing involves market risk, including risk of loss of principal. Take care to ensure that permanent life insurance is suitable for your long-term life insurance needs. You should weigh any associated costs before making a purchase.

Investing can be daunting and sounds complicated to most, so it’s no wonder some avoid it altogether. Plus, people think if you don’t have a big lump sum to invest, it’s not worth it. But that’s not true. You can still kick-start your investment with just an initial start-up amount ofRM1,000 and be on your way to making gains. What kind of investments should you invest in largely depends on your goal, its time frame and your risk tolerance level.

Having a lot of cash doesn’t make you richer, in fact it makes you poorer. Cash is best kept as emergency savings for unexpected or short-term needs. This is because if you leave cash as it is, it is subject to inflation. RM10,000 today may not be able to buy the same amount of things 10 years later. However, a RM10,000 invested today can grow to RM 34,674.45 if you invest in an investment providing 6% interest compounded interest and RM1,200 additional investment annually.

Whether you choose to invest a small amount regularly or put a lump sum into it, it is always better than not protecting your financial future at all.

It is also important to understand the basic investing tools and accounts. These accounts can be used to help you save for retirement as well. You should understand the difference between mutual funds and money market accounts. You should also spread your wealth among several different accounts, even if you want to focus primarily on mutual funds.

You may be considering using real estate as an investment or a wealth building tool. Real estate is a great investment. However, there is a difference between flipping properties and investing in real estate for the long term. You should carefully consider the differences before you decide which one is best for you. Real estate that generates passive income is a great investment, but you need to make sure that it can cover the costs of upkeep and other potential problems as well.

A will is a legal document in which you declare your wishes for your loved ones and how to distribute your hard-earned assets after you pass on. Since death is a taboo subject, many have the impression that a will is only written by people who are dying soon, very old or have a lot of assets. This is totally not true as everyone needs to write a will.

It is hard to imagine your life ending unexpectedly when you barely have wrinkles, but writing a will should still be on the top of your to-do list in your 30s. You don’t need to be Bill Gates-rich to plan for what happens when you are no more. If you die without a will, the law decides who gets what regardless of your wishes or your family’s needs. By having a will, you can provide for your beneficiaries in the manner you prefer instead.  This is especially important for people with minor dependents (children below 18 years old).

It will help to avoid any frustrations, delay, legal conflicts, family disputes, extra cost and stress when the assets of the deceased are distributed. It is not true that your assets will automatically go to your immediate family members when you pass away. Your family may even face a long delay in obtaining their rightful inheritance. This will definitely spare your family from unnecessary heartache, emotional stress and extra expenses in the future.

Furthermore, a will is not just a document assigning your assets to your beneficiaries, but also to assign who becomes the guardian of your assets if your child(ren) is below the legal age. This is important to keep your wealth safe until your child(ren) reaches 18 years of age.

For those who have assets like properties in other countries, it is also advisable to have separate will for each country to avoid any obstacles or delays.

In addition to a basic will, be sure you have an attorney to make legal decisions on your behalf and the will document to even specify how you want your digital assets (social media profiles, digital photos, etc) to be handled.

STEPS TO ENHANCE LIFE INSURANCE

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Bank Negara Malaysia’s (BNM) release of its life insurance concept paper to promote a diversified delivery channel, such as online and walk-in has been seen as something new, but it has to be pointed out that two local insurance firms already offer life insurance products online. Hong Leong Assurance (HLA) launched hlatouch.my, an online insurance platform to buy life insurance. This was the first online life insurance portal in Malaysia allowing customers to read and understand the benefits of the plan. Besides, AXA Affin Life Insurance launched the AXA 100 Cancer Care project, in collaboration with the National Cancer Society Malaysia. This marks the first and only online portal in Malaysia that allows people to sign up for a plan aiming to provide support and care for critical illness patients, especially patients diagnosed with cancer.

Aimed at giving insurance and takaful operators greater operational flexibility, the concept paper proposes the removal of limits on agents’ commissions, which are currently regulated by Bank Negara. Industry experts commend this, saying that the move would propel the industry forward, as sophisticated products should come with higher commissions instead of standardised rates. While it is just a concept paper that hasn’t been finalised, Bank Negara aims to promote greater development and innovation in the industry by allowing players to have more flexibility in structuring and marketing their products. This will stir up competition, as each operator will be able to determine its own commission structure, depending on its business strategy and cost overheads.” The concept paper also suggests a change in the minimum allocation rate, whereby a percentage of the policyholder’s or takaful participant’s contribution is apportioned to his or her unit fund before charges are deducted for operating expenses.

According to the concept note, this is “for the benefit of empowering consumers who prefer to manage their insurance needs on their own, life insurers and family takaful operators must make available similar pure protection products via direct channel and are commission-free, before the limits on commission for these products can be removed”. So, is whether insurance or takaful operators will charge lower or higher agent commission rates if the limits are removed and a minimum allocation rate is implemented? This will depend on the insurance operators, as they will have the flexibility to structure the pricing in whatever way they want. “This means that if you pay [the operator] a premium of RM1,000 in your first year, they must give you back RM700 for your investment account. How they split the remaining RM300, between paying their agents and covering management expenses, is up to them. If they want to pay [agents] more, it will be at their expense, but at least the consumer’s portion is protected.

BNM had laid out several initiatives with the aim of achieving a higher insurance and takaful penetration rate of 75%, against 54% in 2012, based on the target set under the Economic Transformation Programme while also ensuring consumers continue to receive proper advice. In one of its initiatives for diversified distribution channels to widen outreach, BNM stated that this will enhance options available to consumers to access their life insurance and family takaful needs in a way most convenient to them and promote healthy competition in the market. An online product aggregator can serve as a convenient reference point for consumers. It would be run by a third party with a financial adviser’s licence, so consumers can compare and buy products online. This will help consumers make comparisons and a more informed decision. Buying from a bancassurance channel is also different, as they are a bank-backed panel that gets paid for distribution rights. Financial advisers aren’t tied to anyone. This will be a win-win situation for insurance or takaful operators and financial advisers, because operators won’t have to spend as much on their agency force any more. If the adviser doesn’t do a good job, consumers can complain and the financial adviser can have his licence suspended. Bank Negara has wanted to professionalise the agency channel for many years now, but that has been tough. At least with financial advisers, they are regulated by the central bank

Tax Planing and Retirement Funds

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Most people do not have sufficient funds at retirement but they should enjoy their golden years, spend quality time with their loved ones and live their dreams after working hard for all their life. Retirement ranks last when Malaysians are asked about investment, their savings of choice or purpose for saving. According to a survey conducted by TNS for Manulife Malaysia, bank savings rank the highest as the investment of choice among Malaysians (98%) followed closely by fixed deposits (10%) while the penetration for retirement investment or savings rank the lowest at 4%. This shows the inadequacy of the financial literacy among Malaysians. At the core of this is the Private Retirement Schemes (PRS) initiative, a range of investment funds intended to offer Malaysians the option of building up a private pension as a supplement to a state pension and the existing mandatory private pension scheme administered by the Employees Provident Fund (EPF).

Contributors to the Employees Provident Fund (EPF) earning a monthly wage of not exceeding RM5,000 will enjoy a boost in their retirement savings when the revised employers’ statutory contribution rate of 13 per cent takes effect from January 2012. The one per cent increase from the current 12 per cent benefits 5.3 million working Malaysians, comprising 92 per cent of EPF’s active members. However the employees’ contribution rate remains at 11 per cent. As for employees who are 55 years and above and earning wages not exceeding RM5,000, they will also benefit from the revised rate as their employers are now required to contribute at 6.5 per cent which is an additional 0.5 per cent from the current 6.0 per cent, while the employees continue to contribute at 5.5 per cent. While the EPF, being a public provident fund, is approved, not every private provident fund is approved. To gain approval, a scheme must comply with the rules set out by Inland Revenue Board (IRB), one of which relates to investment policy. Another rule stipulates that upon dissolution, the fund monies must be paid into the individual employee’s EPF account.  An added benefit of EPF contribution is that it qualifies for tax deduction by way of personal relief.  Dividends generated from EPF are also exempted from tax.

Establishing a pension source is one additional stream. How do you do this? Join an establishment organisation that provides a pension after retirement. In Malaysia, the government does not set aside a part of its tax revenue to pay its senior citizens a pension. Instead, each individual is expected to look after himself in retirement, either with his savings in the EPF, or on his own. PRS was brought to order upon recognising the need for a better pension system to address the EPF’s shortcomings, a government joint-agency task force comprising the Ministry of Finance, Bank Negara Malaysia, Securities Commission Malaysia and the Economic Planning Unit has been established to review the country’s pension system. According to the Economic Transformation Programme (ETP), Malaysia envisions having a model pension system and vibrant private pension industry. By 2020, we expect the private pension industry to grow to RM73 billion, with more than 2.7 million participants. Specific exemption is given to pensions as follows:

1.      Pensions payable under a written law or an approved scheme to a widow, widower or orphan;

2.      Pensions derived from Malaysia from a former employment in Malaysia. Conditions that must apply are:

·         Pension is payable under a written law (as in public service), or under an approved scheme; and

·         Pension is payable for ill health, or upon reaching the age of 55, or the compulsory age of retirement.

In the case of a foreigner who decides to take up residence in Malaysia, such as under the Malaysia, such as under the Malaysia My Second Home programme, any pension he receives from his home country is, prima facle, subject to tax in Malaysia. However, the foreign pension is not derived from Malaysia as it is not in respect of an employment exercised in Malaysia. As receiving a pension is often not a viable option, one has to “create” one’s own pension source. This takes us to deferred annuity.

A deferred annuity, is one in which the first payment is due only after a period longer than one payment interval. In fact, there is normally a spread of a few (or a lot) of years between the date of purchase and the time when the payment begins. The PRS is offered by Unit Trust Companies and governed by the Securities Commission of Malaysia, while the deferred annuity scheme is offered by Insurance Companies and governed by Bank Negara Malaysia. The unique feature of deferred annuity will provide a regular income after retirement as well as death benefits. Unlike in the UK, deferred annuities are not a common pension source in Malaysia. Going forward, we are likely to see more of these now that the authorities have been encouraging this approach. One such measure is a provision where premiums for deferred annuity are eligible for tax relief. The premium paid for a deferred annuity (issued by an insurer registered under the Financial Service Act) and for approved PRS are jointly allowed a maximum deduction of RM3,000 per year for resident individuals. This is separate and distinct from the RM6,000 for EPF and life insurance premium. One interesting point to note is that an individual may purchase a deferred annuity for his spouse, oarent or children (that is, he is the policyholder who pays the premiums, owns the policy and has the legal rights to the policy, while the annuitant is another individual), and he will still qualify for personal relief of up RM3,000 per year. For more details, refer to Example 9 of the Public Ruling 4 of 2014.

As for PRS, any withdrawal on or after age 55 will be tax-exemp, while any withdrawals from PRS account can be made before retirement age of 55 at 8% tax penalty to be paid to Inland Revenue Board of Malaysia. With the PRS, you are not committed to contribute a fixed sum of money to the fund annually, ie. which means that  you have greater flexibility in determining how much you want to contribute to the fund, if you are the type who are not overly concerned about the personal relief for tax purposes. However, if the early withdrawal is by reason of permanent total disablement, serious disease (such as AIDS, Parkinson’s, cancer or renal failure), mental disability, death or leaving the country permanently, the 8% withholding tax is not applied, that is, the amount withdrawn is tax-exempt. Upon a person’s death, monies in the PRS account will be subject to the usual estate distribution conditions, ie. the immediate family member will need to apply for a Grant of Probate of Letter of Administration to unlock the deceased’s estate for distribution to the beneficiaries, which will take some time to do so. In the case of the deferred annuity, as this is an insurance product, passing on the benefits of the policy to the next of kin is easily effected through a proper nomination and the proceeds are released with relative ease.

PENNY STOCK VS BLUE CHIPS

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Penny stocks have come under the spotlight again. Active trading, especially among the penny stocks, saw the 10 most-active stocks on Bursa accounting for about half the traded volume of shares. The selldown in selected penny stocks spooked sentiment, as the number of losers outpaced gainers at a ratio of three-to-one, but that did not deter the buying of blue chips. The FTSE Bursa Malaysia KL Composite Index closed up 6.73 points to 1,878.89 20 August 2014. Week-on-week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) added 6.68 points, or 0.36 per cent, to 1,870.99, with gains on CIMB Bhd (+20 sen), Tenaga Nasional Bhd (+18 sen), Public Bank (+18 sen), Sapura-Kencana Petroleum (+12 sen) and UMW Holdings (+58 sen) representing most of the index’s rise.

Penny stocks and blue chips are basically opposites, but there is no guarantee that either one is a great investment at a given time. Investors must always be careful when buying any kind of stock. Investors sometimes have the misconception that penny stocks are cheap and therefore will eventually have upside potential. A low share price does not actually mean that a stock is cheap. Only by researching a company's earnings reports is it possible to determine whether a stock's current price over- or under-valued.

Penny stocks usually refers to shares that cost less than RM1 apiece. Penny stocks often belong to newer companies with little operating history and tend to be small-cap or even mini-cap stocks. They are usually indicated with an .OB or OTC (over-the-counter) after the stock symbol, which means that their shares are not traded on the major exchanges. The price movements of penny stocks are usually driven by news of corporate action, contract wins, new business ventures or entry of prominent shareholders or management. To attract investors, they need to spin a credible story of impending corporate action which is done through all known of media (newspaper, word of mouth, social media, etc.). Penny stocks can be difficult to trade because of low liquidity and volume issues, but they can still attract investment capital from certain types of investors. Penny stocks are a very risky investment and there is no guarantee against bankruptcy, but they represent an interesting opportunity to speculators who benefit from the incredibly low share price and the potential for enormous upside. If the penny stock rises to 20 sen from 10 sen, traders make a 50% gain. The prospect of putting a small amount down for large upside potential tends to make people miscalculate or even ignore the risks involved. On the other hand, there are penny stocks that have extremely low trading volume, or are highly illiquid. Existing investors will find it difficult to sell their shares, especially when the price is on a downtrend.

Blue chips, like in poker and other card games, are the most expensive chips. Blue chip stocks are the most valuable stocks on KLSE and are usually from companies that are household names, such as and tend to be large or mid-cap stocks. Blue chips have a long operating history, steady earnings, and a good reputation. They also have high liquidity, or the ability to trade large amounts of a stock without any problems. Blue chips are considered safe bets, especially if the market is falling. However, some blue chips do not always perform well. Blue chips are able to attract institutional funds, thus most are covered by research houses and are often reported in the media. The trading price of blue chips seldom surges, unless there are corporate developments. Blue chips are less attractive to retail investors since the trading prices may reflect the value of the companies. Although blue chips are less risky than penny stocks, their trading prices will also be negatively affected during a financial crisis. However, blue chips stocks are the fastest to recover after the crisis. As for penny stocks, it will take longer for the prices to rebound.

The strategy of picking penny stocks is completely different from choosing blue chips. Buying penny stocks can be a form of diversification for investing portfolios, due to their relative affordability. Investors can own a portfolio comprising penny stocks from different sectors. Retailers usually have a smaller amount of funds to invest. With the same amount of money, they can buy more units of penny stocks than blue chips. For a retail investor or trader, finding the right penny stocks means they have to do their homework, since it is hard to find analytical data and research on these stocks, as they are widely covered by research houses. The lack of interest from institutional investors and foreign funds is the reason why penny stocks are not well covered or not covered at all by analysts. Penny stocks seldom pay regularly. Some penny stocks may not have the attention at the early stage, which enable its share price to rise. Meanwhile, avoid “hot stocks” with large trading volumes and no fundamentals to justify their trading price. It can be risky to invest in these stocks as they usually do not stay hot. Investors who can stomach the risk should still limit this to a small amount in their portfolio. For those inclined and are fully aware of the risks, they should set aside no more than 10% to 15% of their portfolio for such a venture.

The same practice is needed when investing in blue chips. A five-year horizon as investors cannot expect quick gains from blue chips. Blue chips are generally less risky than penny stocks as the share price is supported by fundamentals. Investors have to keep abreast of what is happening in the company and conduct research on the company, and look into its shareholders’ funds, debts, net tangible assets, cash flow and other financial information. A stock can be trading at 90 sen a share and be considered cheap. This is because for that one share, the shareholder is entitled to a fraction of the building, a portion of the cash in the company’s bank account and some of the inventories in storage, which are worth. It is important to make sure the company has a legitimate, viable and sustainable business. The longer its track record in running its business, the better it is for the investors. One should make sure one is not overpaying for the company’s business. The cheaper the investors can get these companies relative to the assets they own of the fair value of their business, which also means the greater value of the shares held.  People should be wary of companies with a lot of debt. When the share price is trading at a significant premium to its net assets, and to what the business should be fairly valued at, then it is high time to get out.

SLOW TAKE-OFF FOR RETAIL BONDS

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The maiden RM300 million sukuk from DanaInfra Nasional Bhd to partially fund the Klang Valley’s mass rapid transit (MRT) kicked-start retail trading of bonds on Bursa Malaysia and would also likely attract the issuance of private debt securities like conventional bonds and Malaysian Government Securities (MGS) made available to the public. The expected issuance is necessary to promote Bursa Malaysia as a market for retail sukuk, he said. DanaInfra is so far the only institution to have issued sukuk on the bourse's Exchange Traded Bonds and Sukuk (ETBS) platform. ETBS offers an opportunity for retail investors to diversify, although its new nature means it is often evaluated in the same way a stock would be, said Jamaluddin. "They are going back to typical equity-type thinking, chasing yields." The government, in the budget last year, announced incentives for companies issuing bonds and sukuk. These include offering companies a double tax deduction for a period of four years for additional expenses incurred in such issuances.

However, there is a "negative perception" that ETBS bonds are more costly than raising funds on the OTC bond market and equity market. There was speculation that the first issue was undersubscribed because the offer period was extended by a week. The announcement that the indicative profit rate would be at 3.7% has seemingly left investor cold. Retail bonds, unlike shares, have a shelf life indicated in their tenure. For the RM300 million sukuk, it is 10 years. The problem with this type of investors’ trading inclination is that it would run contrary to bond’s long-term investment horizon. Moreover, such trading patterns could also likely cause some price distortion between the retail bond market and the over the counter (OTC) market, where investments are done solely by institutional and some high net worth individuals that starts with a minimum investment of RM5 million while retail bonds are at RM1,000. As for transaction cost, an industry participant said that the cost for the OTC market is way lower compared to the retail bonds, likely due to the large transaction amount in the over the counter (OTC) market. The OTC market per transaction cost could be as low at 0.01% compared to a cost of 0.33% in retail bonds. Another concern is investors’ awareness on retail bonds and whether they are comfortable with such asset class. The likelihood of investors who are not knowledgeable on retail bonds would be on the downside. They would likely be ill-prepared for such investments.

Retail bonds are debt instruments while equities are businesses that can make or lose money. Sukuk pay a fixed profit rate and in the case of conventional bonds pay coupon rates. In short, bonds and shares are two totally different asset classes. As such, they have different investments horizon and objectives. It needs to be understood that the positive correlation of risk and reward is clearly reflected in the pricing of these instruments, as the yields are established during the book-building of the over-the-counter (OTC) market. The existing ETBS listings of DanaInfra offer returns superior to fixed deposits with financial institutions, higher than sovereign yields but very low credit default risk as they are guaranteed by the government. DanaInfra's second sukuk, priced based on OTC rates, was oversubscribed 2.19 times. Bursa Malaysia is now courting several financial institutions and government-related agencies to be issuers on ETBS.

DanaInfra is in the process of issuing its third sukuk. The seven-year RM100 million sukuk will carry a coupon rate of 4.23%. The offering, which opened on July 21, was due to close on Aug 15 and be listed on Aug 27. The investment offers pre-determined returns in the form of coupons that are paid out twice a year. Investors need a minimum of RM1,000, which is equivalent to 10 units, to start investing at the initial public offering stage. While there is no fee at point of subscription, the transaction cost on the secondary market is 0.33% of the trade value. According to DanaInfra’s prospectus, the ETBS offered to retail investors have the same characteristics as the bonds/ sukuk distributed to institutional investors. The difference lies in the distribution platform for primary issuance as well as the secondary trading. The ETBS is exchange-based while traditional bonds/ sukuk have to be traded OTC among institutional investors. The other difference is the lot size per transaction. The ETBS is transacted in lots of RM1,000, while the institutional investors transact in lots of RM5 million. The institutional investors might offer their holdings to retail investors via exchange while banks act as intermediaries by breaking the lots and distributed in retail lots.

HIGHER INTEREST RATE IN ASIA

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Bank Negara, the central bank, is likely to take similar, though less drastic, action by raising interest rates on July 10 for the first time in more than three years, to curb strong domestic demand that has ratcheted up debt levels and inflation. The global economy continues to expand at a moderate pace. In the advanced economies, while growth performance has been uneven, a number of key economies have continued to show broader signs of improvement. In Asia, growth is supported by the continued expansion in domestic demand and the improved external environment. In this environment, the international financial markets have remained relatively stable.

Malaysia, Singapore and Thailand all have debt-to-GDP ratios above 70%. Malaysia's ratio stands at 86.8%, up from 60.4% in 2008, and the second highest in Asia after South Korea's 91.1%. Malaysia’s $303 billion (RM964 billion) economy grew at an average 6% in recent years due in large part to a growing government and household credit bubble and its public debt-to-Gross Domestic Product (GDP) ratio has been hovering at all-time highs of over 50% since 2010, thanks to large fiscal deficits incurred when an aggressive stimulus package was launched to bolster the country’s economy during the Global Financial Crisis. After Sri Lanka, Malaysia now has the second highest public debt-to-GDP ratio among 13 emerging Asian countries according to a Bloomberg study. Rising interest rates typically incur an inflow of foreign funds and currency strengthening. Short-term fund flows in Malaysia though, according to AllianceDBS Research chief economist Manokaran Mottain, are negative.

A number of banks raise their base lending rates (BLR) and base financing rates (BFR) in tandem with Bank Negara’s announcement to raise the overnight policy rate (OPR) by 25 basis points (bps) from 3% to 3.25% effective from 16 July 2014 to 18 July 2014. JP Morgan Research noted that it was cautious on banks, as the combination of rate hikes and subsidy rationalisation would test the credit risk management of Malaysia’s consumer-led loan growth in the past five years. For now, the ringgit will remain volatile, or rally to higher levels. The trading range could be moving [to between] 3.18 and 3.22 [against the US dollar]. If there will be an easing, it may stabilize around 3.20 to 3.25. Strengthening US dollar could weaken the ringgit, due to the rapid improvements in the US’ macro picture. The rate hike may be delayed as the authorities may wish to assess the impact of several measures and developments in the economy [such as stricter lending standards, higher inflation and pre-GST consumer reaction] on consumer spending.

What’s interesting is US rate hike cycles don’t normally lead to equity market weakness in equity markets, but it really takes US interest rates to go above a neutral rate, meaning more focused on inflation than growth [before it shows weakness]. From that perspective, the US stock market should continue to do well. We still believe in a global bull market, although we may see a hiccup within a three-to-sic-month window. For Malaysia market, consumer stocks is underweighted due to the impending GST. The first quarter of 2015 should be fantastic for the consumer sector next year, while the second quarter is expected to be weak. Overall though, Malaysian market is affirmative for the next 12 months. A barbell approach is being taken to the market. Interest rates are still low globally and also in Malaysia, although it is starting to go up a little higher. Utilities and telcos wouldn’t be badly hit by any reduction in consumer spending. Sectors that are leveraged to the capital investment side, like the Economic Transformation Programme (ETP) and infrastructure [-related stocks] is preferred.  For banks, people should sit on the sidelines first to see how that works out because of the uncertainty due to the [CIMB-RHB-MBSB] merger talks. As for bonds, Standard Chartered Bank is overweight on emerging market, high-yield government bonds due to their attractive absolute yields of just under 7% and attractive values relative to developing market, high-yield bonds.

PROTECTING YOUR PERSONAL DATA

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Over the past decade, with the rapid development of technological advances and in the area of Information and Communication Technology, vast amounts of personal information are being transmitted, collected, stored and used daily. This in turn opens up an opportunity for processing and also mis-processing of personal data resulting in mounting pressure for data protection law to be enacted around the world. Recently, there has been considerable hype in the Asia-Pacific region in relation to privacy regulations. Malaysia has quietly gazetted its Personal Data Protection Act 2010 (PDPA), effective immediately, and given businesses three months to ensure compliance. Even though the Personal Data Protection Act 2010 has come into force, but the public will have to do their part to make it effective. The rising menace of debt collectors is caused by the lackadaisical attitude of Bank Negara, which show that the creditors could reveal private data of a customer to a third party despite Malaysia having enacted the Personal Data Protection Act 2010.

Data has become an integral part of life in today's world, and thanks to the advent of digital technology, collecting, editing, sharing and transferring data have never been easier. Personal data, which includes identity card numbers, addresses and bank account details, is now the most valuable commodity as well as the most dangerous weapon. The enforcement of the personal data protection law is thus not only timely, but also necessary, to protect the safety and privacy of consumers who have been left too long at the scruples of companies and organisations when it comes to their personal data. After all, can you remember the last time your day has not been interrupted by unsolicited phone calls, text or e-mail messages offering a product or service that you must have or event that you cannot miss?

Data users don’t need consent from subjects for the performance of a contract, such as the details you provide a bank when opening an account, as most of them will be used to perform the contract with the consumer. But if the bank uses the personal data for marketing or other ancillary things, they have to specify in the notice to give consumer transparency. Another circumstance in which data users are allowed to bypass the Act’s general principle is if they have an obligation under another law. This means that the PDPA becomes secondary when there is another Act that overrides it. However, the Act entrusts a degree of responsibility on the data user, as seen in its Security Principle and Data Integrity Principle. The former requires a data user to protect the personal data from any loss, misuse, or unauthorised access or disclosure, while the latter states that it is the responsibility of the data user to ensure the personal data they have is accurate, complete and up to date.

it is important for consumers to know their rights as stipulated in the Act: “right to access, right to correct data, right to prevent damage or distress, right to withdraw from data processing, right to prevent direct marketing, and very critically right to bring complaint on data abuses to PDP Commissioners. The right of access to personal data and right to correct their personal data allows data subjects to make a request to check and verify their information. Any personal data deemed inaccurate can be corrected or struck off the record. To exercise both rights, the consumer will need to make a request in writing to the data user, to which the company or organisation will have to comply within 21 days.

Another important data-subject right provided by the Act is the right to withdraw consent. This provision drives in the message that when a consumer gives consent for their personal data to be processed, it is not forever. When consent is withdrawn, the data user will have to stop processing the personal data. Failure to do so is an offence that carries a fine of up to RM100,000 or a maximum one-year jail, or both.

Taking heed of the public's distress over the rampant unsolicited telemarketing messages, the enforcement of the PDPA will give them the right to ask telemarketers to stop their communications (SMS, e-mail, calls, etc), even if prior consent has been obtained. Failure to comply will cost the direct marketing companies a maximum of RM200,000 fine or jail term up to two years, or both.

Consumers should quickly identify people or companies who have been using their personal data without their knowledge, their consent or otherwise in contrary with the original purpose that they consented to initially. But no worries, we will not risk our members’ personal details by disclosing the data to anyone, it is safe to register as our member!

HOW GST IMPACTS ON PROPERTY

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Recently, there has been concern on how the impending Goods and Services Tax (GST), effective April 1, 2015, will impact the property sector. The spike in property sales could be seen in the months leading up to April 1 next year to compensate for the pre-GST market downturn. Bank Negara Malaysia imposed a number of cooling measures last year to arrest rising property prices. These included putting in place more stringent criteria for mortgage loans. On the fiscal front, the government raised the Real Property Gains Tax (RPGT) to 30% for properties disposed of within three years. It also raised the value of properties that foreigners are allowed to buy from RM500,000 to RM1 million.

However, under the new GST implementation, all building materials and services (E.g. Contractors, engineers) will be subject to GST with a standard rate of 6%. This will invariably raise the production cost for developers. If you understand how GST works, you will notice that in most cases, the additional tax cost is simply passed on to the final consumer (Standard-Rated goods), or is claimed back from the government (Zero-Rated goods). But in this case (Exempt-Rated), the additional tax cost is borne by the party before the final consumer – The developer. The developer does not have a next “victim” in the supply chain. Although a developer cannot impose GST on the residentials, he would have paid GST on building materials and services. A RM1mil house would have a tax element of about RM30,000. He may absorb it and make less profit, if the market is soft. Overall, new residential properties may register a lower overall increase in tax burden compared to Commercial Properties that are Standard-Rated. This is because there still is the chance that developers may only transfer some and not all of their tax cost increases into the final retail price. The downside to this is that where pricing for new commercial properties will be cleaner (Sales Price + GST), pricing for new residential homes would look inflated. This, in turn, will undoubtedly have a knock on effect on prices in the secondary house market.

Some research and analysis on the market prices is recommend. If it is higher than the market price, people should be cautious and avoid to buy it. If people refuse to buy, the developers will correct their pricing structure and bring it down to a more reasonable level. Consumers should be more careful with their sales and purchase agreements. In the sales and purchase agreements, I will note two things. One is that the developer shouldn’t charge any GST [pre-GST]. Item two is, notwithstanding that the developer cannot charge the consumers GST on the property itself pre-implementation, but under the law, the developer can charge people GST on the extras (for projects completed after March 31, 2015). If property owners wish to sell their properties, it is wise to do so before the commencement of GST because it would take time for the market to absorb the initial impact of GST.

INVESTING SINGAPORE STOCK IS GETTING EASIER?

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Malaysian investors will soon find it easier to purchase shares listed on Singapore Exchange (SGX), following an announcement by the regulator and the Monetary Authority of Singapore (MAS) that the board lot size would be reduced to restore investor confidence and trading volume. Effective January next year, the minimum board lot size will be 100 units, instead of the 1,000 units currently.

As a result of this initiative, it will be more affordable to invest in blue-chips stocks, such as United Overseas Bank or Singapore Airlines. For instance, you will only need S$2,200 (RM 5,627) to acquire one lot, compared with the minimum S$22,000 (RM 56,277) previously.

Edmund Chew, author of a Chinese-language book on creating wealth through the stock market, applauds the move. "There are local investors who see opportunities in the SGX, but find it difficult to invest because of their affordability issue, since it is quite expensive when we convert from the Singaporean dollar to the ringgit.

"Malaysian investors can also ride the political and currency stability enjoyed by Singapore," adds Chew, who is a former remisier." With this move, local investors can start accumulating shares and slowly build their portfolios. The SGX is a good start as it is near to Malaysia, and Malaysians are quite familiar with the issues and economic developments there compared with other countries in the region.

Datuk Dr PHS Lim, the president of the Malaysian Investors' Association (MIA), says the move is good news for small investors. " Yes, it is more affordable for investors who buy shares in Singapore. However , investors here still need evaluate the company's corporate earnings and its fundamentals when they make their investment decisions.

The reduction in board lot size is seen as a move to increase the participation of retail investors, which Lim says may have declined as a result of high valuations in the stock market.

An SGX spokesman said in an email reply that the reduction of board lot size from 1,000 to 100 units will apply to all platform. "However, brokers set their own commission rates, including minimum brokerage fee. Investors are advised to contact their brokers for more information," he says.

Currently, local investors can trade on the SGX through investment banks, such as Maybank, Kim Eng, CIMB, RHB, Kenaga and Affin, via their online trading platforms. With this move, Singapore joins the ranks of Asean stock exchanges, such as Bursa Malaysia and the Stock Exchange of Thailand, which have minimum board lot sizes of 100 units. More details of this initiative is expected to be announced soon.

The SGX and MAS also announced other measures for investors, including the requirement for investors to post a minimum of 5% collateral before trading in stocks and to report aggregate short selling positions on weekly basis to MAS. Currently, investors can trade on the SGX, via contra trading, without putting any collateral. Listed companies will now be required to have a minimum trading price of 20 Singapore cents each. There is currently no minimum trading price imposed.

source from personal money magazine september edition 2014

STRUCTURING AN EMPLOYMENT PACKAGE

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Changing Jobs? Taking on another position? Renegotiating your employment package? Well then, it may be an opportune time to look at or relook your compensation package, or potential package, and see if you can make it more tax efficient.

A compensation package typically comprises cash and non-cash component is usually referred to as benefits-in-kind (BIK). Through an adroit combination of cash and BIK, one’s tax bill may be somewhat reduced and disposable income, after paying certain essential expenditures, increased.

The statement above is best illustrated with the following example.

Facts

Mr X is offered a compensation package with a total value of, say, RM200,000 per annum, inclusive of the employer’s contribution of 13% to the Employee Provident Fund (EPF). He has a choice of taking it all in cash or in a combination of cash and BIK.

Mr X is married and has two children who attend private schools. Mrs X is employed with a monthly salary of RM8,000.

CASH PACKAGE

If the package is straightforward and in cash, it will comprise the following

                                                                                    RM

CASH SALARY-----------------------------------177,000 a year

Employer’s contribution to EPF at 13 %--23,000 a year

CASH AND BIK PACKAGE

Alternatively, Mr X may wish to consider the following package.

Unfurnished accommodation at RM4,000 a month;

Company car, which costs RM150,000 (for which the employer attributes an annual cost of RM10,000)

School fees of up to RM20,000 a year;

Leave passage (domestic) of up to RM5,000 a year for the family;

Cash salary of RM100,000 a year;

Employer’s EPF enhanced rate of 17% that is RM17,000.

Total Value of the package is RM200,000  for the year

Before Mr X decides on which package to go for, he should do some calculations to ascertain his after-tax position, his available cash position and his EPF savings

From the example, we see that the cash package is subject to a higher tax, to the tune of RM4,200 (RM29,450 minus RM25,250). The reason for the lower tax in cash-and-BIK package scenario is that although the BIK are subject to tax, the value attributable to them may be less than the actual cost of the 

BIK, as in the case for accommodation and company car.

AVAILABLE-CASH POSITION AND EPF SAVINGS

Now that we know the tax bill is lower by about 15% (14% to 17%, depending on which base is adopted), we should explore next how much cash is left after accounting for the essential outgoings.

In this case, the items are house rent, children’s education, car employee’s EPF contribution of 11% and the yearly holiday. Assume that Mr X will rent accommodation at RM4,000 a month on his own and incur a cost of RM10,000  a year for a car he will lease or buy himself.

Thereafter, the sum total of savings as a result of EPF contributions from both employer and employee is added on to complete the picture.

The lower salary of RM100,000 produces a higher availability of cash, of RM63,750 compared with the RM45,080 from the cash package. This is mainly due to the fact that under the cash-and-BIK package, Mr X basically pays the tax attributable to the value of the BIK. Compare this with the cash package where the outgoings are payable in full after the gross salary has been taxed.

However, it does not stop there. The employer’s contributions to the EPF in the cash package, although at 13%, has a larger base of RM177,000. More importantly, such contribution are tax exempt when withdrawn at retirement or for approved designated purposes, such as house installments and medical treatment.

Overall, in our example, the total amount of cash in hand and savings in the EPF is higher under the cash-and-BIK package. So, from the illustration above, it does look like it might be smart to factor in some BIK in a compensation package (if the BIK feasible for the employer).

But then again, it is undeniable that cash is king. The cash package gives you a higher base amount when it comes to salary increments, bonuses and when you are negotiating for another job. So it all depends on the prevailing circumstances at the material time.

FROM THE EMPLOYER’S PERSEPCTIVES

If the employee benefits, tax-and cash-wise, from receiving a BIK instead of the equivalent cash, how does the employer fare? Usually, but not always, it is a win-win situation- both employer and employee derive some tax benefit or tax deduction.

With reference to the company car in our example, the employer will be able to claim capital allowance ( tax depreciation) of up to RM100,000 against its business income, thus saving tax ( at 25%) of RM25,000 over the course of four to six years, so that the car costs only RM125,000.

As for bearing school fees and house rent and contributing EPF ( up to 19%) the employer will be allowed tax deductions on the amounts incurred. However, pursuant to a policy law, leaves passages are generally not allowed any tax deductions to the employer.

BONA FIDE EMPLOYER-EMPLOYEE RELATIONSHIP

It should be pointed that the preferential tax treatment of BIK, such as adopting pre-determined prescribed values and capping to 30% of remuneration under section is not applicable if the employee is deemed to have control or influence over the employer. In other words, the preferential treatment is only applicable if there is genuine or bona fide employer-employee relationship, that is master-servant relationship.

CONCLUSION

It will be advisable to list your essential outgoings and see to what extent they can be converted into BIK. Then, with the help of your tax adviser, do your calculations to see if the numbers stack up. The calculations should be based on medium term view about 2 to 5 years.

TABLE 1 : AFTER-TAX POSITION

                                                      CASH (RM)        CASH & BIK (RM)

Salary	177,000	100,000
Perquisite – school fees	NIL	20,000
Section 13(1)(a) income	177,000	120,000
BIKs under s 13(1)(b) Motor car (prescribed value) Leave passage	NIL NIL	5,000 EXEMPT
Value of accommodation Defined value               48,000 30% of s.13(1)(a)         36,000 The lower is taxable	NIL	36,000
Less Personal reliefs Self Children EPF	9,000  2,000  6,000 17,000	9,000  2,000  6,000 17,000
Chargeable income	160,000	144,000
Tax charged On first RM100,000 On remaining 60,000 @ 26% On remaining 44,000 @ 26% Tax chargeable/payable	13,850 15,600 29,450	13,850 11,440 25,250

TABLE 2

     CASH (RM)     CASH & BIK (RM)

Cash inflow: Salary Less EPF contribution (11%)	177,000 (19,470)	100,000  (11,000)
Cash inflow: House rent Car School fees Family holidays Income tax	157,530    48,000    10,000    20,000      5,000    29,450 (112,450)	89,000 Nil Nil Nil Nil  25,250 (25,250)
Cash available	45,080	63,750
EPF savings Employer’s contributions Employee’s contributions	23,000   19,470   42,470	17,000 11,000 28,000
Total	87,550	91,750

source from personal money magazine september edition 2014