How Budget 2015 impacts my retirement plans

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)
55-60 1%
60-65 0.5%

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.

today-cpf-infographic-data

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.

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