CPF too convoluted? This is a write up about how to best utilise the CPF scheme to your advantage. Take the time to understand how it all works before making moves.
THE ACCOUNTS
Ordinary Account (OA)
Interest Rates up to 3.5% on 1st 20k, 2.5% after 1st 20k
Ordinary Account to spend on Housing, Education (loan from parents, pay them back later), Investable (limited) thru Endowus (may have Autowealth & MoneyOwl)
Do note that all interest rates are compounded monthly but credited & compounded annually (eg. total interest earned in 2019, credited in 1 Jan 2020), that’s why its a good idea to do RSTU / VC Cash Top Ups early in the year & will be further discussed down below.
Here’s the link for the interest rates & their computation.
Here’s the link for past FAQs on the interest rates.
Special Account (SA)
Interest Rates of 5% 1st 60k (SA) + 0k(OA) / 40k(SA) + 20k(OA), 4% after 1st 60k in OA / SA
Special Account for Retirement only, Investable (more limited than OA), Minimum Amount (FRS) for 2020 Retirees 55 year old = $181k
Medical Account (MA)
Interest Rates of 4% on BHS
Medical Account for medical spending, insurance, hospital stays, minimum amount for 2020 Retirees at 55 year old = $60k
The maximum amount in the MA is the Basic Healthcare Sum. This is instrumental in getting more money transferred to your SA for the 1M65 Strategy (which will be discussed in Part 2 of Maximising your CPF).
Here is the link for past FAQs.
Retirement Account (RA)
Interest Rates 6% on 1st 30k, 5% on next 20k, 4% on remaining FRS amount.
Formed at age 55 with Majority / All SA Monies, OA will be used to top up the shortfall of current year’s FRS, subsequently at age 65, the RA Monies will be pooled into the common pool of your peers & will be used to buy CPF LIFE an annuity that gives out monthly pay outs depending on the plan you’ve selected. (Basic, Standard, Escalating). Do note that the payouts will not automatically be given out at 65 but at 70 unless you’ve specifically told CPF to do so.
RETIREMENT PLANNING
BRS, FRS, ERS at Age 55 & Retirement Age
The BRS will increase every year due to inflation, it increases at a rate of 3~4% based on the previous few years info. At the current rate, the FRS for my batch of peers would amount to about $466,089.98 ~ $634,958.63. So starting your retirement plan early will be essential in the coming years.
Basic Retirement Sum (2020) = $90 500
Full Retirement Sum – 2 x BRS (2020) = $181 000
Enhanced Retirement Sum – 3 x BRS (2020) = $271 500
The BRS is the base amount you must set aside (+ a property pledge, pledging your property with remaining lease that can last you at least until 95 years) for retirement in your RA at the age of 55, after which the monies set aside in the RA will compound at their respective rates until age 65, upon which CPF Life will be bought & your annuity begins (age 65 or 70).
The FRS is the standard amount you will set aside in the RA at the age of 55 after which the monies in the RA will compound at its respective rate until age 65. Any monies above the prevailing FRS amount of the current year when you’ve reached your 55th birthday can be withdrawn as cash OR left in their respective accounts (OA & / or SA) to compound in interest.
The ERS was set up to meet the demands of the population that wanted more in their annuity. It is optional to apply for & can only be bought from 55 – 65. At age 55 – 65, from the standard FRS, money can be topped up to the CPF RA from your SA or Cash to reach the prevailing ERS.
The available amount you can withdraw from your CPF Accounts at 55 will be dependent on the amount you have available inside & the year you were born. A working example here. A full list of FAQs that were asked before.
The current & official retirement age is 62, the Supplementary Retirement Scheme (SRS) Account allows you to withdraw your tax deferred monies that you’ve set aside here at age 62 if you opened your SRS account before any increase in the Official Retirement Age. It is further discussed below.
CPF LIFE Plan Choice at Age 65 – 70
CPF LIFE stands for CPF Lifelong Income For the Elderly, it is an annuity for Singaporeans provided by the Singapore Government. You are already enrolled in it if you are born after 1958.
Why? We are more than likely to live longer with the increasing advancements in Technology & Healthcare sciences. The annuity will provide lifelong income for the elderly (as the name states).
CPF LIFE consists of the Basic, Standard & Escalating plans which will pay out accordingly to the above mentioned (BRS, FRS, ERS). The larger the amount in your CPF Accounts to buy CPF LIFE ( ERS), the more payout you can get.
CPF LIFE Basic Plan has lower monthly payouts BUT higher bequest amounts for your loved ones when you pass on.
CPL LIFE Escalating Plan has lower initial monthly payouts BUT higher payouts at an older age (>85)
CPF Life Standard (you are automatically enrolled in this if you don’t choose at 65) has more monthly payouts compared to the Basic & Escalating Plans initially (more for yourself) BUT less as compared to the Escalating Plan after >85 years old. This plan has very little or no bequest amounts left for your loved ones.
Here’s a computation from LifeFinance.
The CPF LIFE Full Retirement Sum amounts will continually increase with a high certainty. Therefore we stress that your Retirement Planning should start early to take advantage of the delayed effects of Compound Interest. An article discussing about Retirement Planning in Tranches / Levels will be out soon.
RSTU – Build Up Your Retirement Sum Fast With Compound Interest
It is a scheme that enables Singaporeans to build up their retirement fund to get more monthly payments in retirement.
Retirement Sum Top Up via either CPF Transfer or Cash Top Up to your own accounts & loved ones’ accounts.
Dependent on Age & prevailing FRS / RA amount
<55 years old = RSTU up to prevailing FRS amount
>55 years old = from current maxed out FRS amount in RA, RSTU up to prevailing ERS amount
2 Methods for RSTU
CPF Transfer
For: yourself, spouse, your parents, your parents-in-law, grandparents, grandparents-in-law, siblings ONLY)
Cash Top Up
For: Any Recipient
Tax Relief: Max $7k if topping up to yourself + Additional $7k if topping up to anyone else BUT your CHILDREN.
Do not that there are some caveats to topping up with cash as opposed to topping up by transferring CPF Monies. Here’s the reasoning from Heartland Boy. or the Official Calculation from CPF. *psst* it has gotta do with how much you can withdraw from your accounts at 55 / 65! We will go deeper into that below in the ‘CPF Hacks’ Segment.
It’s good to top up early so as to utilise the guaranteed interest to compound your money early & grow your retirement fund faster. You can also have peace of mind when you don’t have to rush at the end of the year to finish topping up (Christmas / Holidays etc).
Here’s the link for the Official RSTU / Cash Top Up Guide.
VC – Build Up Your Retirement Sum Fast With Compound Interest
Voluntary Contributions to build up your retirement fund
2 Methods for Voluntary Contributions
All 3 CPF Accounts (non-tax deductible)
MediSave Account only (tax deductible* for recipient only) There is a personal income tax relief limit of $80 000, which includes all tax limits claimed in totality.
VC to Ordinary Account not allowed.
VC to yourself or other people (Citizen & Permanent Resident ONLY)
VC to children’s accounts allowed
There is a limit to how much Voluntary Contribution you can make in a year, the limit being $37 740. This limit includes the Mandatory Contributions [from your own salary contribution (20%) & employer’s contribution (17%)], so:
$37 740 – (Total Contributions from employee salary & employer’s contribution) = $X of Voluntary Contribution allowed.
This is the Official link explaining tax relief.
This is the Official link for Voluntary Contributions (listed under ‘Making Voluntary Contributions’)
Here is the FAQ for common questions.
HDB Loans, Pay Home Loans with OA or Cash?
For most of us, we would typically use our CPF OA to pay the home loan. This may not be ideal as we will have to return the accrued interest on the home loan to our CPF accounts which will be locked till we reached 55 years of age. Therefore reducing our liquidity. This is important as we will receive less money from the sale of our homes for those wanting to flip the HDB for profit. BUT this really only matters if we sell the house before 55 years old.
Then again theres the Lease Buyback Scheme for those over 65. Covered here by HDB. As well as an explanation of how it works. FAQ linked here.
Here’s the other catch too. Any House Grants received must also be returned to your CPF accounts. Your Enhanced Housing Grant + accrued interest will be returned to your CPF when you sell your house.
Cash then would be a better choice if you want to upgrade and sell the house before 55 years of age. How will you get the extra cash without utilising much of your own energy to earn it? Rent out those extra rooms then. Let others pay for your loans instead.
Now even with using cash to pay for your housing loans, do not forget to keep some emergency cash in your CPF OA too! We’ve talked about having emergency funds (in liquid cash) to weather the unforeseen event of losing your primary source of income here, we should also then leave some monies in the CPF OA (after transferring the bulk of it to SA, further explained below) just in case we are unable to fork out the cash to repay the housing loans. Why keep 20K in your CPF OA? The reason explained here!
Conditions for Uses of CPF for HDB Housing Loans
- You can use CPF OA to pay for housing loan undertaken by parents / siblings if you’re the co-owner
- You cannot transfer your CPF OA to your Parent’s CPF OA to pay for housing loan. Refer to (No.1).
- You can use your CPF OA monies to pay for (1) 10% of downpayment of flat & (2) Balance of purchase price. You have to pay the option fee in cash first when you book the flat. This applies to buying from HDB directly ONLY.
- Other Fees – Stamp Duties, Survey Fees
- You can use your CPF OA to pay for legal fees
- Other Fees – Transaction Fees & Lodgement Fees
- You can use your CPF to pay for HDB Upgrading Programmes & Town Council Lift Upgrading Programmes
- You cannot use CPF to pay for renovation, improvement & repair of your home
- You cannot use CPF to pay for Seller’s Stamp Duty when you sell. Pay by cash.
- You can use CPF OA to pay for recess area.
- You cannot use CPF to pay for Overseas Property.
This is the link for the FAQ for buying HDB, under ‘Points to Consider when Buying a Property’
INSURANCE
Medishield Life
We will not be covering much of this as it is self explanatory & (not much tax relief or ‘benefits’ to be gained here)
A basic health insurance plan that the Singapore Government will help to pay for large medical bills & certain costly outpatient treatments namely Kidney Dialysis & Chemotherapy for Cancer.
Mandatory for Singapore Citizens & Permanent Residents
Foreigners currently covered by Medishield can opt out of Medishield Life
This is the FAQ from Ministry of Health (MOH).
This is the FAQ from CPF.
Dependents Protection Scheme (DPS)
It is a term life insurance plan that pays out some money to help tide the insured & their family members over should the insured member pass on.
For Singapore Citizens & Permanent Residents aged 21 – 60, applicable for opting out. Those below 21 but above 16 can still apply for DPS.
It covers $46 000 worldwide for Total Permanent Disability & Terminal Illness.
This is the FAQ from CPF.
CPF HACKS
OA Shielding
OA Shield to protect against HDB Loan Rates
Using CPF Investment Scheme (CPFIS) to buy into low cost, low volatility funds for the minimal amount of time. Ignoring investment yields of the fund so to do 1 MAIN THING: Protecting your CPF OA from Housing Grant Wipe Out. But if you want even more money churning 2.5% interest, then this method is for you.
Pros: More money in CPF OA to earn interest & more liquidity. – While taking the Housing Grant, a equivalent amount of CPF OA monies will be wiped out (& in turn from the HDB price) till the last 20k.
Cons: CPFIS is still subjected to market volatility & potential losses
How: Apply for CPFIS. Buy into a low cost fund that is approved under CPFIS, BEFORE applying for a Housing Grant. Sell off the investment after grant is received.
SA Shielding
SA Shield to protect against RA Forming
Basically by using CPFIS to buy (for a short while) into low cost, low volatility funds to make your CPF SA a High Yield Savings Account (HISA) at 55 years old when your Retirement Account is formed.
On your 55th birthday, most of the SA monies (if not all) up to the prevailing Full Retirement Sum (FRS) will be locked away & channeled into the Retirement Account. Any shortfall will be topped up by the CPF OA Monies. It will be kept away, growing interest to fund the CPF LIFE scheme. Now that wouldn’t be a good thing because you will have less money generating a perpetual 4% interest in your CPF SA to withdraw. You want MOST of the CPF OA Monies & less of the CPF SA Monies to be used in the formation of the RA. By utilising CPFIS to buy funds with the CPF SA Monies before your 55th birthday, you are essentially blocking the majority of your CPF SA Monies to be placed in the RA. For both the OA & SA Shield, ONLY monies in excess of the 1st $20k in your CPF OA & 1st $40k in your CPF SA can be invested.
Pros: More money in CPF SA to earn interest & more money to withdraw every year. Only withdraw the interest earned every year.
Cons: CPFIS is still subjected to market volatility & potential losses
How: Apply for CPFIS. Buy into a low cost fund that is approved under CPFIS, BEFORE your 55th birthday. Sell off the investment after your 55th birthday.
Result: RA formed with current year’s FRS amount, majority of CPF Account monies in SA earning interest at 4%, lesser amounts in OA earning 2.5%.
Why is this a good thing?
After 55years of age, your withdrawal of CPF Monies must be withdrawn from the SA & its interests first. Once SA monies are depleted, then will OA monies be withdrawn. With a larger amount of SA monies earning interest at 4%, you’ll be treating the SA as an ATM, a perpetual money making machine.
OA to SA Transfer, Max Out MA first?
Why use it? Hedge against losing your job (don’t transfer all of it)
The 4% interest makes your money work harder in the CPF SA than in the CPF OA. Try to hit the Full Retirement Sum ASAP or at least put a conscious effort into growing it faster. For 35 year olds & below, the allocation amount is only 6% of your salary.
It is a balance between the needs of your more liquid CPF OA & your retirement money. Most people would use their CPF OA to pay back the housing loan. Would it be better to use cash instead?
Pros (CPF OA): More liquid, can be used to pay for housing, education & investing.
Pros (CPF SA): High Interest Rate 4%
Cons (CPF OA): Low Interest Rate 2.5%
Cons (CPF SA): Very illiquid, only for retirement, some investing
Why do most people use their CPF OA to pay for their housing loans?
1. More flexibility with their salary
2. Have more things to pay for
3. Limited Cash on hand
Using your CPF OA to pay for your housing loans would then rack up quite a bit of accrued interest which must be paid back to yourself (in the CPF OA) WHEN you sell the HDB Flat. Sure, if you’re not planning to sell the HDB, then you would not have to worry about that accrued interest as you’ll be able to withdraw your money after 55 anyway.
BUT who knows that you might be interested to upgrade & move to a better place, a better location or for some unforeseen reason to sell your flat. Well then, using CASH to pay your housing loan would then be a better decision (calculated risks involved -> losing your primary source of income etc).
So by using cash to pay the loans, you’ll be freeing up the OA monies to be transferred to your SA to earn that sweet 4% interest instead. If you’re open minded enough, you can rent out a room to some tenants to help offset that monthly HDB Loan amount (why pay for your own loans when you can let others pay for you instead right?).
Now you can only transfer amounts up to the current year’s FRS. With time, your CPF SA would be earning a huge amount of interest and be compounded each year. So obviously the earlier you start, the more money there will be waiting for you at 55 years old (or whatever the PEA will be in the future). Be patient young padawans.
With the way the CPF system is set up, healthcare is placed with a high importance as the amounts in the MA are highly restricted to medical related payments only & cannot be withdrawn (in cash) at all. BUT there’s a catch, by reaching the Basic Healthcare Sum (BHS) of the current year earlier, the excess monies earned from the 4% interest & mandatory contributions from your job will be
1. Transferred to SA IF FRS has not been reached
OR
2. Transferred to OA IF FRS has been reached
You can reach the BHS earlier by VC to MA using cash (with Tax Relief). This is so that more money is being poured into your SA earlier to reach the FRS ASAP.
It’s all about reaching these milestones ASAP to let compounding do its magic. You can’t turn down free money right?
INVESTMENT
SRS
Tax Deferment linking to VC
A voluntary scheme to supplement your income in old age. It is better for high income earners who are in a higher tax bracket as only 50% of the money taken out after the current Official Retirement Age of 62 (2020) will be subjected to Tax. There’s a limit of $80 000 tax relief that you can get for each Year of Assessment. The monies in the SRS Account can then be used to buy into investment products. A limit of $15 300 can be added to the SRS Account per year.
FAQ from MOF.
FAQ from CPF.
FAQ from IRAS.
CPFIS
Having mentioned CPFIS above already, we will touch on how you can invest. You can either register under CPF and get buy the funds listed or you can go with the first private company to use your CPF Monies to invest, Endowus. They might be the first but there is news that AutoWealth will be launching their CPF Investment Product soon in 2020.
Why invest your CPF OA?
Especially with Endowus being the first & currently only CPF investment advisor, Endowus helps you invest into the US S&P500 where gains have reached on average 6 ~ 9% annualised. They buy into Dimensional Fund Advisors’ funds or a feeder fund into Vanguard. You’ll have a higher chance of gaining (as well as losing) these returns (if invested in the long run > 10 years) as compared to sticking with CPF OA 2.5% guaranteed. This is not a recommendation or investment advise but a highlight to the options available.
When to invest?
Preferably when you have reached the FRS of the current year &/or you don’t intend to utilise the monies in the next few years.
ENDING NOTES
The rates are guaranteed but locked in till you’re 55. It will depend on how the government moves to continuously bring about returns they can guarantee in the future. You don’t have to like the government but you sure can like money compounding for you. Make use of it especially when you’re young & time works in your favour.
Finance & Design 
Leave a comment