TAKEAWAYS
Americans have their Roth IRA. Brits have their pensions. Australia has its superannuation accounts. Singapore? We have CPF – the Central Provident Fund.
A significant chunk of your life’s income will go to the CPF for the next few decades, so it’s imperative that you take the time to understand it.
Here’s our take on some of the key functions of CPF. This is definitely a long article but we assure you, it’s worth the read.
Every Singaporean will have three CPF accounts created for them at birth. These are the:
One more account – the Retirement Account (RA) – will be created for you, when you turn 55. But more on that later.
When you start working as a young adult, 20% of your salary goes into your three CPF accounts; another 17% is contributed by your employer.
The idea is that by putting aside money, you’ll have enough money to achieve your goals at the different stages of your life.
What goals? Let’s start with the first.
Likely age: 20s and 30s
Most Singaporeans will use their CPF to buy a house, using money from their OA. This will allow you to pay for your house without depleting your cash savings or take-home pay.
Making downpayments
To buy a house, you’ll need to put some money down. Depending on the type of loan you take, you can pay 15–20% of your property price with your CPF.
For example, for a $500,000 HDB, you can pay up to $75,000–$100,000 in CPF.
Mortgage
You can also apply for your monthly deductions to be made from your CPF OA. Click here for more details.
What you need to look out for
However, because money in your CPF is also meant for your retirement, anything that goes towards paying your mortgage will not be able to be used for retirement.
For that reason, CPF accrued interest exists. This means that any money used for housing (and education) in your OA, will have to be paid back into your CPF OA – when you sell your house – at an interest rate of 2.5% per annum.
For example, if you used $100,000 worth of CPF OA funds to pay for your house, you’ll owe $2,500 accrued interest after one year, and $5,062 after two, and so on and so forth (it compounds every year).
Hence, the way we see it, you have two options:
1) Pay for your house with your CPF OA, meaning that you have more cashflow. Plan your own retirement with the cash that you have.
2) Pay for your house with cash, and leave your CPF OA untouched. You might want to transfer your OA monies to SA to earn additional interest.
Likely age: 20s, 30s, 40s
*SA and MA rates will be adjusted from 1 July to 30 September 20231
Money in your OA account grows at a slow and steady pace at 2.5% per annum, which is pretty okay and should help you keep up with inflation long-term. However, it’s nothing terribly impressive. For that reason, people “invest” their CPF and try to grow it at a faster rate than 2.5%. There are generally three ways people go about doing this.
1) Investing their OA
CPF will allow you to invest anything above a $20,000 balance in your OA account under the CPFIS (CPF investment scheme). Some of these investments give potentially higher returns, but also carry the possibility of losses. The investments include Shares, Bonds, Unit Trusts and Digital Advisor portfolios. Check out the full list here.
If you think that the investment can beat OA’s 2.5% return long-term, this is worth serious consideration.
2) Investing their SA
CPF will also allow you to invest anything above a $40,000 balance in your SA, under the same CPF-IS scheme, featuring the same investments. SA’s interest rate is between 4–6%, so if you think that your investment returns can beat those figures, it’s worth serious consideration.
For what it’s worth, we (TWS) do not think it’s worth the risk, since 4% is a pretty solid risk-free return that’s already guaranteed.
3) Transferring money to SA
If you don’t intend to use your OA for housing or education needs, you can transfer the balance to SA. This will mean you earn 4–6% interest, as opposed to 2.5% interest. You can also deposit cash into your SA, or your loved ones’ SA to grow their monies there.
Do note that the process is irreversible, so keep in mind your short-term cashflow needs. The next possible time you could have these monies in cash is when you turn 55 (more on that later).
Likely age: 30s and 40s
When your income increases, the amount of tax you start to pay increases as well, thanks to Singapore’s progressive income tax. That said, you can get your taxable income reduced if you contribute to your CPF accounts.
Mandatory contributions to CPF
You already get tax relief based on your mandatory contributions to CPF. For example, if you contributed $10,000 a year to CPF, you will get $10,000 in tax relief.
CPF top-ups
You get to reduce taxes of up to $16,000 if you do CPF top-ups to your own and your loved ones’ Special, Medisave or Retirement accounts. That’s a maximum of $8,000 for you, and another $8,000 for your loved ones – a total of $16,000.
What you need to look out for
Remember, what you put into CPF cannot be easily taken back in cash. If you need cash in the short term, you might want to rethink putting money into CPF – even if it’s to get tax relief.
Likely age: 30s and 40s
At some point, you might have kids, siblings or relatives who are going to school. Or, you or your spouse might want to go back to school. That’s where you might use your CPF again.
Under the CPF Education Loan Scheme, you can use up to 40% of your OA savings to pay for the fees from approved institutions in Singapore (list here). The interest rate from this Loan Scheme is the prevailing CPF OA interest rate (2.5%), which is significantly lower than what private education loans provide, which at the time of writing is 4–5%.
How much, in percentage, can you pay?
You can pay 100% of the fees with your CPF, if you’re paying for yourself, your child, sibling or spouse. If you’re paying for a relative, you can only pay:
Repayment
Repayment can be made in cash in one lump sum, or via monthly instalments over a maximum of 12 years.
What you need to look out for
CPF monies are primarily designed for retirement, so do make sure the education loan is paid back, so you can meet your retirement needs.
Likely age: 40s and 50s
This isn’t exactly age-specific, but there’s a high chance that the older you get, the higher your medical expenses will be. That’s probably also the time you get reacquainted with your CPF’s MA. The money in your MA account goes towards three things:
1) Paying eligible bills from hospitals and clinics
2) Long-term care, such as
3) Premiums for national health insurance policies
You can also use your MediSave for yourself or your family members. This includes your spouse, children, parents, grandparents, or siblings.
Generally, you will try to pay for healthcare bills using insurance first. Once you’ve reached the claim limits, then you’ll turn to the actual dollars sitting in your MA.
At 55 years of age, you get to withdraw some of your CPF funds, provided you meet some conditions. Let’s have a look.
What happens when you turn 55
At 55, CPF will create an account for you – the RA. Money from your SA and OA will then go into that RA. Specifically, how much? – $198,800, which is known as the Full Retirement Sum. (These retirement sums will be updated every year to keep up with inflation, but we’re using 2023 figures for this article).
What are retirement sums?
Simply put, retirement sums are amounts that the Singapore government uses to judge your adequacy for retirement. There are three types of retirement sums:
1) There is the Basic Retirement Sum ($99,400), which means that you only have enough for an extremely barebones way to live.
2) There is the Full Retirement Sum ($198,800), which is an amount that should provide a basic standard of living.
3) Last but not least, there’s the Enhanced Retirement Sum ($298,200), which is 1.5 times the Full Retirement Sum.
Why are these retirement sums important?
What retirement sum you have matters in two ways:
1) The amount of withdrawals you can make at 55;
2) How much payouts you get at 65 (more on this later).
Withdrawals at 55
If you’ve reached the Full Retirement Sum, you can withdraw any excess amount left in your SA and OA, except your RA.
If you own a property in Singapore, and you have reached your Basic Retirement Sum, you can withdraw your CPF savings above this Basic Retirement Sum.
If you do not meet the Basic Retirement Sum, you only get to withdraw $5,000 at age 55. Sad.
At age 65, you’ll be included in the CPF Lifelong Income for the Elderly (CPF LIFE), which is an annuity scheme that pays you money monthly until your death. The higher your retirement sum, the more payouts you get. There are three schemes from CPF LIFE you can choose from:
1) The Basic Plan gives a lower monthly payout, but if you pass away, you leave more for your loved ones.
2) The Standard Plan gives higher payouts; it’s also the default scheme.
3) The Escalating Plan starts with lower payouts, but increases by 2% each year to match inflation costs.
Likely age: 80s and 90s (but touch wood)
Contrary to popular belief and misinformation, your CPF does not go into the government coffers by default. Instead, you can make CPF nominations to determine who gets your hard-earned monies. (Do note that a will does not cover where your CPF monies go.) Your CPF nomination lets you choose:
If you do not make CPF nominations, the monies will be distributed by intestacy laws; your family members and loved ones will still get the money, albeit with some delay. There’s
another misconception that your beneficiaries will have your CPF deposited in their CPF accounts. This is false – it will be deposited into their designated bank accounts.
While CPF is a mostly effective tool to grow your wealth, it does have its limitations. In our opinion, its main limitations are its complexity and lack of flexibility.
Because CPF is meant to meet the financial needs of most Singaporeans, it will likely not cater to you if your life stages are more unique. The rules are also not particularly straightforward, as you can tell by the length of this article.
Some common gripes among certain Singaporeans are:
Our take? CPF is not going away any time soon. You don’t need to love it, but you absolutely need to use it.
Stay woke, salaryman
1 https://www.cpf.gov.sg/member/infohub/news/news-releases/cpf-interest-rates-from-1-july-2023-to-30-september-2023
© 2024 Institute of Singapore Chartered Accountants
