Written by Letitia Jinghui Lean, edited by Jackie Tan
If you’re like me, a soon-to-be graduate about to enter the workforce, it’s probably high time you started getting acquainted with CPF. You know, “that compulsory government scheme that siphons off part of your allowance each month”. It’s gotten a bad rep for locking away the average Singaporean’s money till age 55, but there is another side to this complicated savings scheme, and we’re here to break it down for you. For the average millennial seeking financial independence and security, here’s your blueprint to understanding the intimidating CPF system to better guide you to a comfortable retirement:
#1 CPF is multi-functional
It sounds like CPF is just one jumbo savings/pension fund, but well, that’s barely scratching the surface. As defined by the Central Provident Fund Board, CPF is a “social security savings plan that provides working Singaporeans with security and confidence in their retirement years”, and every month, 20% of your salary (as the employee) goes to this account, whilst another 17% is contributed by your employer. This applies for all Singaporeans, unless you are: (a) self-employed, (b) working overseas, or (c) have renounced your citizenship.
Most importantly, CPF comprises 3 subsidiary accounts – Ordinary (OA), Special (SA) and Medisave (MA). Remember the 37% of your salary that goes into CPF every month? Till age 35, different amounts are allocated to each of these subsidiary accounts like clockwork – 23% for OA, 6% for SA, and 8% for MA. It’s a whole different ballgame above 35, but eh, we’re sure you can google the new percentages when you hit that age. For now, just remember these numbers, and that each of the 3 subsidiary accounts have different purposes: the OA is used for housing, investment, education and insurance, the SA is used for retirement and investment, and the MA is used for hospitalization and medical insurance expenses.
#2 A fourth account – the Retirement Account (RA) is created when you’re 55
At 55, the remaining balances in your OA and SA are combined and transferred to automatically form the RA, to provide for comfortable self-sufficiency and retirement in old age. Monies are transferred up to the Full Retirement Sum (which increases approximately 3% every year), up to the Basic Retirement Sum (half of the FRS) with a property pledge, or even beyond for the Enhanced Retirement Sum (1.5 times the FRS). If you have excess above the minimum required retirement sum in your RA, this is when you can withdraw it, at the ripe age of 55.
The next milestone is then 65 years old, under a nifty lil’ scheme known as CPF LIFE. For now, all you need to know is that CPF LIFE is what gives you the monthly payouts once you’re old (and preferably not too wrinkly) at 65, and it’s based off your RA. The general rule of thumb: the more you have in your RA, the higher your monthly payouts.
#3 There are different interest rates for OA, SA and MA
As mentioned previously, CPF is kinda like a compulsory savings account, which means that it automatically generates interest for you, which introduces an almighty term – compound interest (great for more moolah). Interest rates for OA is at 2.5% per year, whilst rates for SA and MA are at 4% per annum. This is way higher than what most banks tend to offer for savings account (about 1% or less), so rejoice my fellow young adults!
As a bonus, there’s an additional 1% interest for your first $60,000 in your CPF – a good deal because that means you get higher interest rates for your OA at 3.5% and your SA at 5%. One caveat: this additional interest is capped at $20,000 for OA, and $40,000 for SA. Wily millennials will know it’ll make more sense to transfer money from the OA to SA to milk that higher interest rate for the SA account, but word to the wise – this transfer process is irreversible, so do give it careful consideration based on your own personal goals and circumstance before you make the decision.
#4 You get tax relief for being pious
As a full-fledged working adult, you will have to pay taxes. It’s inevitable, unless you pull a Trump. You can however, reduce the amount of taxes you have to pay, by voluntarily topping up your own or your family members CPF SA account. For each year, you get up to $7,000 in tax relief when you perform cash top-ups to your own account, and an additional tax break of up to $7,000 when you do the same for your loved one’s SA account – that’s up to $14,000 in tax relief a year! It’s a win-win situation because you save yourself from having to pay excessive taxes, whilst building your retirement fund at the same time.
#5 You can specify who receives your CPF savings after you pass on
Our time on this earth is finite. In Singapore, when you die (touch wood), the monies in your CPF account will be distributed to your surviving family members according to intestacy laws. For those who want more control over how your CPF savings are distributed, consider making a CPF nomination to ensure that your loved ones are taken care of upon your death, and the money gets distributed according to your wishes.
#6 You can pay for a home using CPF
As any Singaporean will attest, buying a house/apartment/flat in Singapore is ridiculously expensive. Its common practice to use savings from the CPF OA account to buy a HDB flat (assuming you’ve gotten your BTO), or to use it for monthly loan repayment to pay off the mortgage under the public or private housing schemes.
For those keen on buying a house in the near future, here’s 2 things to consider:
- Remember that the process of money transfer from your OA to SA is irreversible, so if you’re dead set on getting a house, stick to your guns and keep the money in your OA until you’ve bought one. The caveat of course, is if you don’t intend to purchase a property, or if you can splash the cash and do not need your CPF to cover for the cost of the property.
- Remember that to withdraw CPF funds from your RA for retirement at 55, you will have to satisfy the Basic Retirement or Full Retirement Sum with sufficient property pledge. A property pledge is a promise you undertake to return the CPF funds used to pay for your housing, with interest, should you sell your property. TLDR; if you want to withdraw all the excess monies in your CPF savings when you hit 55, you will have to own a house. Otherwise, it’s a cap of $5,000 on the amount you can withdraw from your RA.
Still confused? Here’s a more comprehensive review from DollarsandSense about the whole CPF-HDB housing scheme. You’re welcome.
Adulting is tough, entering the workforce with its mountain of responsibilities even tougher. We’ve consolidated just 6 key aspects of CPF most relevant to young adults, that we hope will help you navigate the complexities of adulthood better. Time to make the most out of your CPF, and win at it!
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