Deciphering the Updates: Understanding the latest CPF Changes March 5, 2024

The latest changes to the Central Provident Fund (CPF), as unveiled in the 2024 Budget by Singapore’s Deputy Prime Minister Lawrence Wong, bring forth two significant modifications. Let’s examine how the removal of the Special Account (SA) for members aged 55 and above, and the increase in Enhanced Retirement Sum (ERS) may affect us.

1. Removal of Special Account (SA) at age 55

At the age of 55, your CPF Retirement Account (RA) is created. The savings from your Ordinary Account (OA) and Special Account (SA) will be transferred to your RA account to meet the prevailing Full Retirement Sum (FRS). The system will first draw from the member’s SA, followed by the OA if necessary.

SA Shielding

Prior to the change, if you have excess funds over the FRS at 55, you may prefer to keep them in the SA because the interest rate in the SA is 4% (4.08% from 1 Jan to 31 Mar 2024), while the interest in the OA is 2.5%. Due to the difference in interest rate, there exists a strategy, known as “SA Shielding” where members invest their money in their SA just before their 55th birthday, and then unwind their position shortly after they turn 55. The system will draw the money in the OA for RA. When the investment is liquidated, , the money returns to the SA account to earn a higher interest. Since SA is withdrawable after 55, it functions similarly to a high-yield savings account.

The closure of SA after age 55 means that this strategy will not be viable. This will impact members who have surplus funds in their OA/SA in excess of the FRS when they turn 55, as well as members above 55 who currently have funds in their SA, or are still employed. In the absence of the SA option, individuals must choose whether to commit the excess funds into their RA for a potentially higher CPF life payout, or explore alternative investments if they wish to seek higher returns.

2. Increment of Enhanced Retirement Sum (ERS)

CPF Life is our national retirement plan designed to assist members in meeting their financial needs during their golden years by providing a lifelong income starting from age 65. The “Retirement Sum” serves as a guide on how much monthly income one can expect and this amount is adjusted to account for inflation. The following table can help you better understand the various “Retirement Sum” options.

The payout is still subjected to the actual amount in RA, payout age and the plan you chose. You can use the CPF life estimator here: CPFB | Calculators

How much income can I generate with the higher ERS?

Source: https://www.mof.gov.sg/docs/librariesprovider3/budget2024/download/pdf/annexf1.pdf

The ERS increment will generate an additional $800 (2025 figure) in retirement monthly payout. To further increase this income, members can consider delaying their payout age from age 65 up to age 70. With every year of delay, members can potentially increase the monthly payout by approximately 7%

For members who prefer CPF Life, this increment gives you the option of building a bigger stream of passive retirement income to meet your retirement needs. Conversely, members who aren’t as keen to commit more to CPF Life, may need to look for alternative investments due to the removal of the SA.

Members may be hesitating to contribute more to their Retirement Account (RA) for reasons beyond delayed gratification. Let’s examine those reasons.

Is it true that interest earned in the RA is not yours?

CPF life is meant to provide members with a retirement income for life. However, in the event of a member’s early passing, the total “CPF Life premium” less payout received will be returned, along with any remaining CPF savings in your OA and Medisave Account (MA). So suppose you top up your RA to the FRS of $205,800 just before 65, the entire sum of $205,800 will be used as CPF Life Premium if you choose the “Standard” plan or “Escalating” plan.

Source: CPFB | How much CPF LIFE premium balance will my beneficiaries receive when I pass away?

This begs the question, what about the interest earned from the $205,800? Unknown to many, all accumulated interests are actually consolidated to support members who live longer. Thus, CPF Life essentially functions as an insurance product, wherein you are exchanging the 4% return on your funds for the possibility of a longer payout period due to increased longevity.

Now let us consider sticking to the “Basic” plan, instead of choosing the “Standard” or “Escalating” plan.

Source: CPFB | How does the CPF LIFE Basic Plan work?

As opposed to the “Standard” or “Escalating” plans, opting for the “Basic” plan entails a deduction of only 10-20% of your RA savings as CPF Life Premium. The remaining 80-90% remains in your RA, and continues to accrue interest at 4%, while providing the monthly income drawdown until the age of 90. It is only after reaching this age that your monthly income switches to the CPF Life fund pool.

In the event of a member passing away before reaching the age of 90, the bequest amount comprises the remaining RA account balance, including the interest earned on the RA, and the unused CPF Life Premium, which constitutes the 10-20% of RA savings deducted at age 65. The “Basic” plan allows individuals to retain the majority of the interest earned, albeit resulting in a reduced monthly income compared to the “Standard” plan.

*Extracted from a video CPF LIFE Standard, Basic or Escalating Plan: Which Should You Choose? (youtube.com)

To put things in perspective, let’s study the table above. By choosing the “Basic” plan instead of the “Standard” plan, one gets about $130 less each month, but the difference in the bequest amount between age 75-85 is significantly different. Based on the average life expectancy of 83.7 years old (Singstat.gov), 18.7 years of $130 equates to $29,172 less in payouts, but the difference in the bequest amount is about 93-98K.

Conclusion

When it comes to retirement planning, there are no one-size-fits-all solutions, nor are there absolute right answers. The decision-making process is influenced by numerous factors, including individual circumstances, beliefs, risk tolerance and the array of available options. Individuals should reach out to their financial advisors should they be uncertain about making any financial commitments.

As a Wealth Manager, my role is to help my clients understand their options, evaluate their individual circumstances, and make informed decisions regarding their retirement planning. By providing personalised guidance and insights, I aim to empower my clients to choose the approach that best aligns with their goals and aspirations for retirement.

Contributor:

Lieu Teck Hua
Wealth Manager
Phillip Securities Pte Ltd (A member of PhillipCapital)
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