10 Tips to Optimize your CPF for a Comfortable Retirement
By Desmond Lin
10 Tips to Optimize your CPF for a Comfortable Retirement
By Desmond Lin
To help you better understand how to optimize your CPF funds for retirement, we will walk you through the CPF retirement framework and reveal tips to maximize the full potential of your CPF accounts.
What is CPF
CPF [1] is a key pillar of the Singapore retirement savings framework. It comprises three accounts – the Ordinary Account (OA), the Special Account (SA), and the Medisave Account (MA).
The CPF scheme is designed to encourage Singaporeans to save up for their retirement. Under the scheme, employees and employers are required to contribute a portion of their salaries to their CPF accounts. The contributions are then used by the government to invest in various assets to generate returns for CPF members.
Figure 1.0: CPF Contributions Table
(Image taken from CPF website)
What is CPF life?
CPF LIFE [2] is an annuity scheme that gives you a regular income stream for as long as you live, starting from the age of 65. It is backed by the full faith and credit of the Singapore Government. Under CPF LIFE, your retirement savings in your CPF Ordinary Account (OA) and Special Account (SA) will be used to purchase a life annuity.
There are three options under CPF LIFE – the Basic Plan, the Standard Plan, and the Escalating Plan. Under the Standard Plan, you will receive a fixed annuity payout for life, while under the Escalating Plan, your annuity payouts will increase at 2% per year to help keep pace with inflation.
The Basic Plan is a legacy plan carried over from the time CPF LIFE was first introduced in 2009. Unlike the Standard Plan which gives higher and level monthly payouts, the payouts under the Basic Plan are lower and will get progressively lower when your combined CPF balances eventually fall below $60,000. This is because the Basic Plan is designed to provide a sustainable income for life, rather than giving out high payouts that may not be sustainable in the long run.
You can start receiving your payouts as early as age 65, or delay it to as late as age 70. You can also choose to receive your payouts monthly, quarterly, half-yearly or yearly.
How much money can I get from CPF LIFE?
The amount of money you can get from CPF LIFE depends on your account balances at age 55 [3], and the plan option that you choose.
You can use the CPF LIFE calculator to estimate your monthly payouts.
How do I join CPF LIFE?
You will be automatically enrolled in CPF LIFE when you turn 55 years old unless you opt-out or cancel your membership (subjected to T&C). If you choose to opt-out or cancel your membership, you can do so by logging into your CPF account or contacting the CPF Board.
*You will only be able to opt-out of the CPF Life scheme if you prove that you have an annuity or pension plan that pays out sufficiently according to CPF’s benchmarks.
What are the benefits of CPF LIFE?
CPF LIFE offers many benefits [4], including:
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A regular income stream for life: This can help to provide financial security in retirement.
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Inflation protection: Your annuity payouts will increase at 2% per year under the Escalating Plan, to help keep pace with inflation.
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Flexibility: You can choose to receive your payouts as early as age 65, or delay it to as late as age 70. You can also choose to receive your payouts monthly, quarterly, half-yearly, or yearly.
The CPF Retirement Account
Retirement Sums for CPF Members (BRS, FRS, ERS)
The Basic Retirement Sum (BRS), Full Retirement Sum (FRS), and Enhanced Retirement Sum (ERS) [5] are used as guides to help you calculate how much money you'll need for your desired retirement payouts. If you own a property in Singapore with a remaining lease that can last you to at least 95 years old, you can set aside the BRS.
The FRS is two times BRS and is meant to provide you with higher monthly payouts. Your CPF OA and SA will be used to meet the FRS when you turn 55.
The ERS is three times that of the BRS. If you wish to receive even higher payouts, you can choose to set aside the ERS by making a top-up after you turn 55.
As of 2022, the Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS) is set at $96,000, $192,000 and $288,000 respectively.
Below is an estimation from the CPF Life Estimator:
Figure 2.0: CPF LIFE Estimator
(Image taken from CPF website)
When you turn 55, a Retirement Account will be created for you using savings from your Special Account (SA) and Ordinary Account (OA) if the SA cannot meet the Full Retirement Sum (FRS). The retirement account will continue to compound interest at 4% and CPF life will start the payouts to you at 65 (or if you choose to defer till 70).
The more you have on your Retirement Account (RA), the higher the payouts when CPF life starts paying out.
Now that you have a rough overview of the CPF retirement framework and their respective interest rates, you will have a better understanding and make use of the 10 tips below on how to realize the full potential of your CPF accounts by maximizing your interest rates when building your retirement funds.
Tip #1: Topping up with cash / Transferring from OA / SA via the Retirement Sum Top Up Scheme (RSTU)
The power of compounding interest is greatest when it begins early. Your CPF accounts are already earning some returns, but there's room for more — and that means compounding at higher interest rates! The earlier you start optimizing your savings with these valuable funds the better; as opposed to waiting until later on down the line.
You can use the Retirement Sum Topping-Up Scheme [6] to top up your savings in the Special Account / Retirement Account. The current interest rate for CPF SA/RA is 4% per annum. If you are above 55 years old, you may also transfer funds from your Ordinary Account and Special Account into your Retirement Account. The interest earned on the transferred amount will continue to accrue and compound in your Retirement Account.
This is an especially useful tip for those who have just turned 55 and have not started to draw down on their CPF savings. If you have spare cash, it makes sense to put it into your Retirement Account where it can grow at a higher interest rate, rather than letting it sit idle in your Ordinary Account
Interest Earned P.A(2022) on CPF Accounts
Ordinary - 2.5%
Special Account - 4%
Retirement Account (After 55 Years Old) - 4%
Medisave Account - 4%
Assuming a retirement age of 65 (CPF Life starts), this would give you an extra 10 years of compounding at an extra 1.5% interest rate — which can make a big difference in the long run.
If you are leaving your cash sitting in your bank, you are earning interest at ~0.1% per annum or ~1% on fixed deposits.
Tax Incentives
Additionally, if you do a CPF cash top-up, you enjoy up to $8,000 [7] in tax relief which will translate to more savings depending on your personal income tax bracket.
If you are above 55 and still working, you can still top up and enjoy the same tax relief of $8,000. Also, if you are above 55, you can top up to the limit of the Enhanced Retirement Sum (ERS), however, the additional top-up beyond the Full Retirement Sum will not enjoy the tax incentive.
You may also top-up for your loved ones and get an additional $8,000 tax relief if they do not have an annual income of more than $4,000 per annum unless they are handicapped. You can potentially get $16,000 in tax relief in total!
To qualify for the tax relief, the top-up has to be made to one of the following members:
● Parents,
● Parents-in-law,
● Grandparents,
● Grandparents-in-law,
● Spouse,
● Siblings.
You can also top up to your child's account to help them when they are older. This will help them have more money when they are done with school. You can do this by transferring money from your bank account or from your CPF account. The interest you earn on the money will keep growing, and this will help your child have a lot of money when they are ready to retire. However, you will not get a tax incentive for the top-up.
It is advisable to do the top-up in January every year as the interest is compounded annually and you earn an additional 11 months of interest as compared to topping up in December.
By leveraging the power of compounding, we will show you an example of the difference if you hit Full Retirement Sum (FRS) at 35 years old and 45 years old.
Case Study
With $192,000 at 35 years old, by 55 years old, there would be $420,695.64 just from the 4% compounding interest from the Special Account (SA).
With $192,000 at 45 years old, by 55 years old, there would be $284,206.90 just from the 4% compounding interest from the Special Account (SA).
That is an estimated $136K difference.
Additionally, if you have excess cash or funds in your OA account, it would be great to top up to hit the FRS as early as possible.
Tip #2: Contribution to the Annual Maximum Limit of $37,740
The annual maximum limit for CPF contributions is currently $37,740 [8]. This means that you can contribute up to this amount each year to your CPF account(s). This limit is reviewed and adjusted every year, so make sure to keep track of the latest figures.
Contributing to your CPF account(s) will help to boost your retirement savings, as well as earn you an additional interest in your contributions.
The current wage limit for CPF contribution is $6,000 per employment.
Case Study
If you are earning $8,000 per month, your CPF contribution (including your employer) would be $2,200 per month, $26,400 per annum. If you received an additional bonus, that would be higher. For this example, we will assume there are no bonuses, therefore you would be able to top up an additional $11,340 ($37,740 - $26,400) for that year. Should you top up above the limit, the excess will be refunded without any interest. The top-up will also not enjoy any tax incentive; however, you will be earning compounding interest at prevailing rates.
You may also check your top-up limit at the CPF website.
The top-up will be allocated the same way as your regular CPF contributions into your OA/SA/MA accounts
If you are currently retired, since you do not have any CPF contribution, you may consider topping up to the maximum limit annually and enjoy risk-free compounding interest with your excess cash
Tip #3: Housing Loan repayment using cash instead of CPF
Most Singaporeans take out a housing loan to finance their property purchase. The loan is usually repaid over a period of 25 or 30 years, with monthly installments comprising both interest and principal repayments.
The majority of borrowers repay their housing loans using CPF funds. This is convenient because the monthly repayments are automatically deducted from your CPF account, and there is no need to set aside cash for this purpose.
The downside to making repayments with your CPF OA is, because since you are drawing down your CPF OA and having more cash on hand, most people will keep the cash in the bank, earning an interest rate of that is most likely less than the CPF OA interest rate, as compared to using cash for repayment and letting your CPF OA compound at a rate of 2.5% per annum.
By using cash repayments, this also means that you will need to set aside cash each month to make the repayment. Make sure you have enough cash flow to cover the repayment. This is important because missed repayments can result in penalties.
Case Study
Most Singaporeans take out a housing loan to finance their property purchase. The loan is usually repaid over a period of 25 or 30 years, with monthly instalments comprising both interest and principal repayments.
The majority of borrowers repay their housing loans using CPF funds. This is convenient because the monthly repayments are automatically deducted from your CPF account, and there is no need to set aside cash for this purpose.
The downside to making repayments with your CPF OA is, that since you are drawing down your CPF OA and having more cash on hand, most people will keep the cash in the bank, earning an interest rate of ~0.1-1% per annum as compared to using cash for repayment and letting your CPF OA compound at a rate of 2.5% per annum.
Using cash repayments would also mean that you will need to set aside cash each month to make the repayment. Make sure you have enough cash flow to cover the repayment. This is important because missed repayments can result in penalties.
Tip #4: Cash Refund of CPF savings you had used to pay for housing
The Voluntary Housing Refund Scheme (VHR) [9] was introduced in 2013 to allow Singaporeans to refund their CPF savings used for their home purchase. The scheme is voluntary and you can do it as long as you have excess cash.
To qualify for the VHR, you must have used your CPF savings to buy a property.
As with most cases in Singapore, the majority would have opted to borrow from their CPF OA balance for their home purchase. However, any sum (including any housing grant) borrowed from the CPF has to be repaid, together with the accrued interest.
Any housing grant will be paid to your CPF OA before they are withdrawn again for the loan, therefore, the grants have to be repaid to the OA together with the accrued interest once you sell your property
You can check how much is owed to your CPF by logging in to the CPF Portal > under Home Ownership
You can see the principal amount that is withdrawn and the accrued interest so far.
With the VHR, you can return this amount without selling your property. Once you do a refund to your CPF OA, you immediately earn 2.5% compounding interest annually (instead of being charged 2.5% interest on the principal amount owed)
Fixed Deposit with No Fixed Term at 2.5%?
If you are above 55 and you have met your Full Retirement Sum (FRS), you can withdraw this amount instantaneously or leave it in your OA to continue earning 2.5% annually.
Benefits
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Liquidity if you are above 55
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Higher interest rate than fixed deposit (without the lock-in)
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Risk-free as the CPF balances are guaranteed and backed by the Singapore Government
Note that if you are above 55 and are looking to withdraw this amount, the amount will be drawn from your SA before your OA. However, we do not want that as the SA earns 4% interest instead of 2.5% on the OA. You can speak to a Financial Consultant if you are interested to find out how you can withdraw this amount from your OA without touching your SA.
Tip #5: Keeping your sale proceed in your CPF after sales of property [10]
As aforementioned, if you sell your property, you will have to return the principal and accrued interest back to your CPF OA. However, things are quite different once you turn 55 and sell your property after that.
Selling your property after 55 years old
If you have pledged your house for retirement, the sale proceeds will be used to top up your Retirement Account (RA) to the Full Retirement Sum (FRS). Any excess balance will then be your cash profit.
Since you are above 55 years old, any excess balance will be returned to you (within 1 week) after meeting the Full Retirement Sum (FRS).
This process is automatic and the money will be returned to your bank account registered with the CPF Board.
You will then encounter a re-investment problem if you do not need this excess money or are still currently working.
If you do not want the return to take place, you will have to inform CPF 2 weeks before the sale of your property.
By keeping your sale proceeds in your CPF OA, you will continue to earn 2.5% compounded interest, guaranteed and backed by the Singapore Government without any fixed-term or lock-in period like a fixed deposit account.
Tip #6: Additional Interest on the first 60,000
The Government pays extra interest on the first $60,000 [11] of your combined CPF balances, which is capped at $20,000 for Ordinary Account (OA) savings. This extra interest is intended to help boost retirement savings.
The extra interest earned on your OA savings will go into your Special Account (SA) or Retirement Account (RA) to enhance your retirement savings. This can help you to reach your retirement goals more quickly, and enjoy a comfortable retirement.
Figure 2.0: CPF Interest Rates
(Image taken from CPF website)
Additional Tip
Top up your child's CPF account by cash or transfer to the maximum combined balance of $60,000. This $60,000 will earn 5% compounding interest annually!
However, this top-up will not qualify for any tax incentive.
Tip #7: Investing via CPFIS
The CPF Investment Scheme, or CPFIS, is a scheme that allows members to invest their CPF savings in a variety of investment instruments. These include fixed deposits, bonds, shares, and unit trusts.
The CPFIS was introduced in 2003 to give members more choices in how they grow their retirement savings. It is a voluntary scheme, and members can choose to invest all or part of their CPF savings (subject to certain limits).
According to a report of the CPFIS-OA Profit and Loss, only 60% of the CPFIS-OA investors managed to beat the guaranteed rate of 2.5%, which means 40% of the CPF investors ended up worse off leaving their money in their OA account.
If you are not a seasoned investor, it would be best to talk to a Financial Consultant to understand more about what you are investing with your CPF monies.
As of Oct 2021, there are no charges for the CPFIS, every dollar from your CPF will go into the investment.
Tip #8: Re-depositing CPF Life Payouts into OA
If you are still working at 65, and you do not need the payouts, you can defer the payout to start at 70 years old. If you are still working at 70 years old or you do not need the monthly payouts and would like to take advantage of the OA account 2.5% compounded interest annually, you can do so.
The payout is automatically deposited to your bank account registered with the CPF board.
To have the payout automatically go to your CPF-OA account, simply just close the bank account linked with the CPF payout and the payouts will be deposited to your CPF OA account. Whenever you are ready to receive the monthly payout, simply link the new bank account and you will start receiving them monthly.
Tip #9: Re-balancing your CPF just before 55
The Special Account and Retirement Account pay the same base interest rate, but the Ordinary Account pays less. It can make sense to see our Ordinary Account balances flow into our Special/Retirement Account instead.
Due to this reason, it might make sense to transfer our Ordinary Account balances to our Special Account before we turn 55. Doing so may lead to a more optimal Special Account shielding, enabling us to keep more in our Special Account.
This tip is most beneficial if we have a large Ordinary Account balance that we would rather see flow into the Retirement Account compared to our Ordinary Account balance.
Case Study
Anyone turning 55 in 2022 has to set aside the Full Retirement Sum of $192,000. If the person has $200,000 in their Ordinary Account and $100,000 in their Special Account, by employing the Special Account shielding, he or she allows their Ordinary Account balances to fund the entire Full Retirement Sum (FRS), apart from the first $40,000 that will come from their Special Account. This way, they would have $40,000 remaining in their Ordinary Account and $68,000 in their Special Account.
With Special Account Shielding
Ordinary Account - $40,000
Special Account - $260,000
After topping up the retirement account,
Ordinary Account (2.5%) - $40,000
Special Account (4%) - $68,000
Retirement Account (4%) - $192,000
By employing the SA shielding, the individual would have more funds in their SA account which is giving a higher 4% compounding interest.
Without Special Account Shielding
Ordinary Account - $200,000
Special Account - $100,000
After topping up the retirement account,
Ordinary Account (2.5%) - $108,000
Special Account (4%) - $0
Retirement Account (4%) - $192,000
Without the Special Account shield, they would have $108,000 in their Ordinary Account, $0 in their Special Account, and $192,000 in their Retirement Account. Although this earns much lower interest returns compared to using the Special Account shielding. If you would like the cash payout, then this option will be better.
The way to do the Special Account shielding is to transfer our Ordinary Account balances to our Special Account before we turn 55.
This way, we can make sure that our entire FRS is funded by our Special Account, and we can also take advantage of the higher interest rates offered by the Special Account after fulfilling FRS.
Tip #10: Preserving and distributing your CPF balances
When it comes to our CPF nomination [12], there are three key points we should keep in mind: the first is that we can nominate anyone as our beneficiary, regardless of their relationship with us; the second is that the nominee does not need to be a Singaporean citizen or permanent resident; and the third is that if we do not make a nomination, our CPF savings will be distributed according to the intestacy laws in Singapore.
If you do not make a nomination, your CPF balances will be handed over to the Public Trustee for the administration of CPF balances that are not nominated. There is a fee charged by the Public Trustee for this administration.
Below is the summary of the charges
For the first $1,000 - 2.400%
For the next $9,000 - 1.500%
For the next $240,000 - 0.750%
For the next $250,000 - 0.450%
For amounts in excess of $500,000 - 0.300%
By making a nomination, you could actually save quite a bit on the fees.
Conclusion
Navigating the various schemes and information available can be daunting and confusing. I hope that this article has helped to provide some clarity on the best way to optimize your CPF savings.
While there are many other strategies not covered here, these 10 tips represent some of the most impactful and easy-to-implement methods for ensuring that you get the most out of your retirement savings.
We have shared 10 tips to help you optimize your CPF funds. They are:
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Top up with cash or transfer from Ordinary Account/Special Account via the Retirement Sum Topping-up Scheme
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Contribute the Annual Maximum Limit of $37,740
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Make housing loan repayment using cash instead of CPF
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Cash Refund of CPF savings you had used to pay for housing
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Keeping your sale proceed in your CPF after sales of property
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Additional Interest on the first 60,000
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Investing via CPFIS
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Re-depositing CPF Life Payouts into OA
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Re-balancing your CPF just before 55
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Preserving and distributing your CPF balances
We hope that this article has helped to provide some clarity on the best way to optimize your CPF savings. There are many other strategies not covered here, but these 10 tips represent some of the most impactful and easy-to-implement methods for ensuring that you get the most out of your retirement savings.
It is important to plan ahead and make the most of your CPF funds by utilizing the full potential of compounding interest.
Should you require any assistance or help in implementing the above tips, contact any of our Financial Consultants for a free no-obligation consultation.
References:
[2] https://www.cpf.gov.sg/member/retirement-income/monthly-payouts/cpf-life
[4] https://www.cpf.gov.sg/member/retirement-income/monthly-payouts/cpf-life
[8] https://www.cpf.gov.sg/employer/making-voluntary-contributions
[12] https://www.cpf.gov.sg/member/account-services/providing-for-your-loved-ones/making-a-cpf-nomination
Disclaimer:
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Please refer to the list of disclaimers at: https://www.prudential.com.sg/FC-info
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Approval code: 528/09Jun22
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Figures (CPF interest, contribution rates, etc.) are based on the prevailing rate and subjected to change. These figures are accurate at the time of the writing.