As I started planning for my retirement, I began to pay attention to how our Central Provident Fund (CPF) system works for retirees.
As retirees reach the age of 55, CPF allows them to withdraw $5,o00 and transfers the rest of the money from their Ordinary Account (OA) and Special Account (SA) to their Retirement Account (RA). Retirees can also withdraw anything above the Full Retirement Sum (FRS) or Basic Retirement Sum (BRS) by pledging their properties.
At 65, retirees can choose to withdraw 20% of their Retirement Account (less the $5,000 withdrawn at 55). Naturally the monthly lifetime payout from CPF Life would decrease if they make the withdrawal.
Here’s a gap that I noticed. What if I plan my retirement strategy early, manage to achieve the Basic Retirement Sum (and pledged my property) as planned, and still have excess money in my Retirement Account? At the current CPF life scheme, it looks like the excess money would be channeled into the CPF Life scheme if I don’t withdraw them.
An idea that came to mind would be for CPF to provide banking features to retires by setting up Retirement Savings Accounts (RSA) for retirees to manage the excess money after deducting the BRS/FRS for CPF Life.
Here’s how I think the system could work.
The proposition for a Retirement Savings Account
The RSA would replace the Retirement Account at age 65 where CPF Life kicks in and deducts the BRS/FRS amount. It would hold the leftover money in the Retirement Account so that retirees do not have to withdraw the money at age 65 if they don’t need it. Retirees could also choose to make the RSA the default account of choice to receive CPF Life monthly payouts.
The RSA would continue to generate an interest of 4% like the Retirement Account to provide the added incentive for retirees to leave their money in the account until they have an actual use for it.
Provide a simple mechanism for retirees make withdrawals
Like a bank, CPF can install automated teller machines (ATMs) to allow retirees to withdraw cash from their RSA in small amounts. In fact, CPF can choose to link to atm⁵, an interbank network in Singapore that connects the ATMs of six of Singapore’s eight qualifying full banks to facilitate cash withdrawals to minimize costs.
A Pioneer Generation card that matters
The current Pioneer Generation card serves little purpose for retirees apart from medical subsidies. By integrating RSA with the Pioneer Generation card, the card can function as an ATM card for retirees to make withdrawals or even pay for purchases (at a later stage).
Making Retirement Account top-ups a lot easier
RSA would make it a lot easier for retirees and their loved ones to top-up the account easily through bank transfers. As loved ones know that retirees can access the top-up amount easily, they would be motivated to top up the retirees’ RSA. Like typical bank accounts, RSA will have a digital paper trail that allows IRAS to manage relief claims easily.
This is just a wild idea that came right off the top of my head and is just a proposition at best. This idea could debunk the idea that most Singaporeans have where CPF money does not belong to them. While I can’t think of any reason why this idea wouldn’t work, I would really love to hear your thoughts.
Over the past week, the local media has been giving bite-sized news about what’s going to be announced in Singapore Budget 2015 plan and today, the Deputy Prime Minister and Finance Minister, Tharman Shanmugaratnam gave the speech to give the full details about Singapore Budget 2015 on local television.
I didn’t really care much about Singapore Budget announcements in the past but as I started planning for my retirement, I started keeping an eye out for articles about policy changes that could have an impact on my retirement plans.
I can’t say I was thrilled about the policy changes that were announced today. Let’s talk about how the changes affect me, a middle-income Singaporean in his early 30s.
50% rebate for personal income tax
The Finance Minister announced that one-off 50% rebate for personal income tax will be given this year for income earned in 2014. The rebate is capped at $1,000 so that the benefit goes mainly to middle and upper-middle income groups. After calculation, I found that this rebate is fully utilised if you earned around $60,000 in 2014.
Although my current income is above $60,000 per annum, I won’t be able to fully utilise this tax rebate. This is because I went on a 6-month unpaid sabbatical last year. On top of that, I made a contribution of $12,750 to my SRS account to minimise my total taxable income. In estimate, I should be looking at a double digit figure for my tax payable for income earned in 2014.
In my opinion, this is just a low hanging fruit that our Finance Minister is using to score some points with Singaporeans. It does not have any sustainable impact at all. I wouldn’t care too much about this.
CPF salary ceiling raised from the current $5,000 to $6,000
The last time changes were made to the CPF salary ceiling was in September 2011 when the CPF salary ceiling was raised from $4,500 to $5,000. Starting from 1st January 2016, the CPF salary ceiling will be raised to $6,000.
This is the policy change that impacts me the most because I am currently earning $1,000 above the CPF salary ceiling of $5,000 each month and that $1,000 goes straight into my pocket each month. From January 2016 onwards, I will have to contribute an additional $200 (20% employee CPF contribution) each month.
Being a glass-half-full kind of guy, it just means I would have to either find a way to earn $200 passive income each month, or spend $200 lesser in order to maintain my monthly saving limit. I prefer not to reduce my monthly saving limit because I need the money to pay for the new property I bought in Cambodia.
On the flip side, the government is making me commit a forced saving of $200 into my CPF account. This additional $200 is something I won’t need as the property loan that I refinanced recently is within my current monthly CPF Ordinary Account contribution amount. That makes a total of $2,400 that I can consider transferring to my CPF Special Account to maximise the interest.
I did my own calculations based on my current income and retirement strategy and here’s what I found.
My Basic Retirement Sum projection is $308,492.60 (assuming the Basic Retirement Sum continues to increase at 3% each year). At the current CPF salary ceiling of $5,000, I should be able to achieve a Retirement Sum of $422,177.86 when I reach 55 years old. With the new CPF salary ceiling of $6,000 kicking in from 2016 onwards, the Retirement Sum increases to $543,138.75. That’s an huge increase of 28.6%! If I transfer the forced saving of $2,400 from my Ordinary Account to my Special Account for the extra interest, my Retirement Sum grows by another $14,000 to $558,102.06!
Do note that my calculations are based on the current plan to retire and stop working at the age of 50.
Supplementary Retirement Scheme contribution cap raised from $12,750 to $15,300
In line with the increase in CPF salary ceiling, the contribution cap for the Supplementary Retirement Scheme (SRS) will also be raised to $15,300. It is a good thing because this increases the amount of tax savings for middle income Singaporeans who want to reduce their total taxable income. However, I wonder what kind of impact does a $2,550 increase really have.
Although I contributed to my SRS account last year, I don’t think I would do the same this year due to my property purchase in Cambodia which I intend to pay off fully with cash.
Extra 1% interest on first $30,0o0 in CPF accounts for Singaporean from 55 and above next year
To encourage older Singaporeans to continue working, the Finance Minister is giving an additional 1% interest on the first $30,000 in CPF accounts for Singaporeans. My current retirement plan is not to have to work after the age of 50 and the extra 1% interest is not attractive enough for me to change my plan.
Looking at my projections for the Basic Retirement Sum and the estimate Retirement Sum that I would achieve, I’m still face a shortfall of more than $50,000 to meet the Full Retirement Sum. There’s a high chance that I would use my property charge or pledge my property and contribute the Basic Retirement Sum at the age of 55. That means I would still have more than $30,000 in my CPF accounts to receive the extra 1% interest anyway.
Increasing CPF contribution rate of older workers
2016 will be the year where we see a change in CPF contribution for older workers. Here is what the increase looks like.
|Age Band||Percentage Increase|
|50-55||2% (1% by employee)|
Do take note that the increase in employer contributions will go to the Special Account, while the increase in employee contribution will go to the Ordinary Account. While there will be some Singaporeans who will lament that the employer contribution going into the Special Account can’t be touched, we should remember that the objective for the increase is to supplement our retirement nest.
What I didn’t like about this is that, is this increase too little too late? I mean at aged 50-55, the extra 1% from employer works out to only $720 per year and anyone who understands compound interest would know that having this increase in the Special Account so late in the game of retirement would make little impact even with a high interest rate.
That said, I’m glad that workers aged 50-55 are getting the same employer CPF contribution rate as the younger workforce. It is a step in the right direction.
My overall opinion about Budget 2015 and retirement planning
I find that while Budget 2015 does address retirement adequacy, the key initiatives is only the first step to tackling retirement adequacy. What the Finance Minister has done is to force Singaporeans to save more money through CPF for retirement. As shown in this post, forced saving has its benefits as I can expect my CPF retirement nest to increase by more than 25% in the next 23 years.
Apart from that, Singaporeans have to depend on themselves to plan their retirement. If one does not cultivate good money management habits, retirement will be nothing but a dream. For example, if one pours the additional CPF contribution (OA portion) into a home loan to get a bigger property, he/she is going to lose out on enjoying the additional interest that CPF pays out.
As someone who is planning for retirement, it is obvious that any change made to the CPF system can easily throw a wrench into the gears of a smooth sailing retirement plan. Therefore every time the government makes a change into the CPF system, it warrants a close examination on the impact it makes to my retirement plan.
A new name for Minimum Sum and breaking it down further
In the past, whenever CPF publishes new information about retirement policies, they struggle to explain the details because it’s not a clear cut story about whether you meet your Minimum Sum or not. There are also options to meet only 50% of your Minimum Sum as well and it does get confusing at times.
Moving forward, we have new names in place of the CPF Minimum Sum which I feel, would help better explain CPF retirement schemes a lot easier.
Basic Retirement Sum
The amount you need to have in your CPF Retirement Account after pledging your property to CPF. Now we have a proper name for this instead of repeatedly saying “50% of your Minimum Sum” all the time. As of 2016, the Basic Retirement Sum will be $80,500. Meeting the Basic Retirement Sum and pledging your property will allow you to receive a monthly payout of $650-$700 at the age of 65 for life.
Full Retirement Sum
The Full Retirement Sum is the new name for Minimum Sum. It is essentially double the amount of the Basic Retirement Sum and stands at $161,000 as of 2016. For Singaporeans who do not own a property (or do not wish to pledge his/her property), he/she will need to meet the Full Retirement Sum in their Retirement Account. This will allow you to receive a monthly payout of $1,200-$1,300 at the age of 65 for life. Considering that the Full Retirement Sum is double of the Basic Retirement Sum, I’m surprised that the monthly payout for the Full Retirement Sum is not double of the monthly payout for the Basic Retirement Sum.
Enhanced Retirement Sum
The Enhanced Retirement Sum is for Singaporeans who want to receive a higher monthly payout for life. They can opt to top up their Retirement Account to three times the Basic Retirement Sum, which is $241,500 as of 2016 and receive a monthly payout of $1,750-$1,900 at the age of 65 for life.
Predicting your Basic Retirement Sum in advance
One of the recommendations made by the CPF Advisory Panel that I like is giving Singaporeans an advance notice of the Basic Retirement Sum applicable to them. The government has accepted the recommendation of increasing the Basic Retirement Sum by 3% annually from 2017-2020. This allows Singaporeans who reach the age of 55 in this time frame to have a good perspective of what they need to accumulate in their Retirement Account.
Assuming that the Basic Retirement Sum will grow by 3% consistently until I become 55 years old in 23 years time, the Full Retirement Sum that I need to accumulate in my Retirement Account would be $306,562.70. That is very close to double the Full Retirement Sum today!
While I don’t expect the Basic Retirement Sum to grow consistently at 3% (it may be even higher!), doing the math gives me a rough visibility on what my Retirement Account needs to look like when I reach the age of 55. It allows me to plan better and also work harder towards my retirement age.
Using your CPF charge instead of pledging your property to meet Basic Retirement Sum requirements
A property pledge is a commitment saying that if you sell your property, you will refund the pledged amount, as well as any CPF money used to buy the property and interest it would have accrued, into your CPF account.
A property charge is automatically applied when you use Ordinary Account savings to buy a property. The amount you used, and interest it would have accrued, must be returned to your CPF account if the property is sold.
One of the recommendations made by the CPF Advisory Panel is to allow the use of the property charge that most Singaporeans have with CPF to meet the Basic Retirement Sum requirements instead of pledging their property. For Singaporeans who don’t have a property charge, they can then pledge their property. It makes a whole lot of sense and I’m grateful for this recommendation to be approved.
By my calculations, it looks like I will be able to reach the forecast Basic Retirement Sum at my ideal retirement age of 50 if nothing changes to my employment status. As I am paying for my property using my CPF, I would have a decent amount of property charge accumulated that could be used instead of pledging my property for the Basic Retirement Sum.
Flexibility to withdraw 20% of my Retirement Account balance at the age of 65
Including the $5,000 that I could withdraw when I reach the age of 55, I can withdraw up to 20% (less $5,000) of my Retirement Account balance at the age of 65. While I don’t have any intentions to withdraw 20% of my Retirement Account at the age of 65, I think that this is a good option as nobody can predict what could happen in the future. The lump sum withdrawal could come in handy if I need to fully repay any outstanding loans.
A lump sum withdrawal at the age of 65 would naturally equate to a lower monthly payout for the rest of my life so I will have to think long and hard before making this decision.
Ability to opt to start payouts later, up to the age of 70
I bet the CPF Advisory Panel has looked the existing annuity plans provided by insurers when they came out with this recommendation. It’s a simple idea. If you opt to receive monthly payouts at a later age, you are allowing your Retirement Account to accumulate more interest. This is great for Singaporeans who don’t need the payout at the age of 65.
Personally, I plan to start my monthly payout at the age of 65 instead of deferring because I have a personal goal of retiring at the age of 50. While retiring does not equate to not working, it really does mean that I want to be self-sufficient and not fully rely on my employment income. The monthly payout could help to cover most of my monthly expenses (if not all).
What does these new changes to the CPF system mean to me
Having made a forecast on what the Basic Retirement Sum would look like when I reach the age of 55, I believe that I will be able to meet the Full Retirement Sum which is double of the Basic Retirement Sum as planned initially. That gives me the option of opting for the Full Retirement Sum or just meeting the Basic Retirement Sum and either use my CPF property charge or pledge my property to CPF. At this point in time, I feel that it is most likely that I would choose the former. My current plan of receiving monthly payouts at the age of 65 will not change as the incentive is not attractive enough for me to defer the payouts.
Having looked at the approved recommendations from the CPF Advisory Panel, what are your plans?
For more information, click here to download a summary of the CPF proposals.