The Central Provident Fund (CPF) is a big part of every Singaporean's life. Although you can only access your CPF savings under certain conditions, it pays to understand and manage your funds with prudence, to ensure financial well-being beyond retirement.
If you have heard of the term "CPF" but are not sure what it is and how it helps you, check out this short CPF guide for newbies by GET.com to get a good understanding of what the CPF is, and how it makes all the difference to your future.
So What Is CPF?
The CPF is a mandatory savings scheme funded by both employees and employers. In other words, you pay part of the money you earn, whether you like it or not, and that money is then used to pay for big expenses which you, being young and optimistic, might not think about. Your CPF savings serve 3 of your most important needs in life – housing, healthcare and retirement.
While it is difficult to tell whether your CPF savings will be enough to actually cover your needs (due to our different earning power and lifestyle choices), you can safely say it still works as an effective social security safety net. To put it simply, at least you won't end up living on the street.
For beginners, you need to first know that you will need to contribute up to 20% of your monthly salary to your CPF piggy bank. The contribution percentage depends on your age and whether you work in the private/public sector, and the contribution amount is capped at $1,200 monthly.
Yes, that bites, but because the employee's contribution amount is automatically deducted from your pay, you almost don't feel the pinch! Pretty much, you just have to get used to thinking of your take-home pay as the amount left over after CPF deductions, and your CPF savings as a bonus to tide you through your major life needs such as housing, healthcare and retirement.
What's great is that each year when you receive your CPF statement, you can actually watch the savings grow, as the interest payments earned on your CPF savings are higher compared to what you would earn if you put that money into a bank savings account. You might not be able to enjoy those savings right now, but they are there and will benefit you someday.
Another big plus is that your employer actually contributes up to 17% of your monthly salary to your CPF savings as well. That effectively means you are saving up to 37% of your salary each month towards your future!
Let's just say you earn $3,000 per month in total. This is how your salary would be broken down, and how much you will be left with:
If you got paid 13 months of salary in a year, your CPF savings would come up to $14,430 per year, excluding interest payments. How great is that? Most new graduates have probably never had an amount like that in their account before.
Where Does The Money Go?
As mentioned earlier, you can only use your CPF savings for certain designated purposes, and that's the whole idea. We all know that we can't trust ourselves with free access to money, right?
The money you and your boss pay into the CPF is divided into several different accounts, for your different needs. Let's look at what each account is for and what you are able to do with them.
Ordinary Account (Up To 3.5% Interest p.a.)
Out of the 37% of total income contributed to your CPF savings account, 23% automatically goes into your OA if you are 35 years and below. This percentage is gradually reduced over the years as a larger proportion of your CPF contribution moves into your Special Account and Medisave Account for your healthcare and retirement needs.
The CPF OA pays out an interest rate of 2.5% p.a. Plus, you get to earn an extra interest of 1% p.a. on up to $20,000 from your OA, for the first $60,000 of your combined balances.
Do note that the extra 1% interest received on your OA will go into your CPF Special Account if you are below 55 years old, or your CPF Retirement Account if you are 55 and above for retirement purposes.
CPF tip from GET.com: Try to reach $60,000 in your CPF combined balances faster by topping up your CPF account with any extra savings you might have, or money you manage to save after covering your budget, so that you can earn the extra interest of 1% p.a. This extra 1% will add up to $600 per year on your $60,000, and you will earn those extra yields on all the money that goes into your OA from then on.
There are many things that prevent young Singaporeans from investing. But if you do feel confident about investing, you can also use money from the CPF OA to invest. However, don't bother making an investment if it doesn't pay dividends that are a lot higher than the interest rates which the CPF pays out. Investments can fail, but the CPF isn't likely to go anywhere anytime soon.
Note that the profits you make by investing your OA savings go straight into your OA, and cannot be withdrawn until you become eligible for pay-outs.
To make an investment using your OA savings, you need to be at least 18 years old, have no bankruptcies to your name and you will need to have accumulated more than $20,000 in your OA.
Special Account (Up To 5% Interest p.a.)
Money in your CPF Special Account (SA) is earmarked for retirement so you have less flexibility with regards to how you can use it.
If you are 35 years and below, 6% out of the 37% of total income that goes into your CPF savings monthly is channelled towards your SA. This SA contribution percentage rises gradually to 11.5% above 50 years old, before it decreases as the total income contribution towards your CPF is reduced above 55 years old.
While you can still use money from your CPF SA to invest (you will need to save more than $40,000 in your Special Account to do so), the instruments you can invest in are more limited as they need to involve less risk.
Do also note that the base interest rate you earn on your SA is 4% p.a., with an extra 1% p.a. paid on the first $60,000 of your combined balances. This rate is higher than the 2.5% p.a. earned on your OA, so unless you are confident that your investments can return a lot more than 4% p.a. in profits, forget it.
You can even transfer money from your OA to your SA to earn the extra base interest of 1.5% p.a. If your main concern is being well funded in your older years, doing this can be a very good idea.
Medisave Account (Up To 5% Interest p.a.)
Your Medisave Account (MA) is dedicated to your healthcare needs. The account helps you to put aside part of your income to pay for your personal or immediate family's healthcare expenses.
You will earn a base interest rate of 4% p.a. on your MA, with an extra 1% p.a. paid on the first $60,000 of your combined CPF balances.
For those under 35 years old, out of the 37% of total income you contribute to your CPF savings each month, 8% goes into your MA. That percentage rises gradually to 10.5% above 50 years old, as we become more vulnerable to health issues as we age. You can check out what you can use Medisave to pay for here.
CPF tip from GET.com: As we get older, we can expect our healthcare expenses to increase. While we have Medishield Life to help us pay for large hospital bills, you may want to take up additional health insurance, such as integrated shield plans or rider policies to provide you with more comprehensive coverage.
Retirement Account (Up To 6% Interest p.a.)
When you reach the age of 55, a fourth account called the Retirement Account (RA) is automatically created. The money in your OA and SA will then be transferred to your RA to become your retirement sum, whereas the Medisave savings in your MA will remain there to pay for your future healthcare expenses.
You will earn a base interest rate of 4% p.a. on your RA, with an extra 1% p.a. paid on the first $60,000 of your combined CPF balances. Those age 55 and above will get an additional 1% interest on the first $30,000 of their combined CPF balances.
Under the CPF Lifelong Income For The Elderly (CPF LIFE) national annuity scheme, you will be able to start receiving monthly payouts for life from the eligible payout age of 65. You will receive higher payouts if you set aside a bigger retirement sum in your RA. There are 3 levels of retirement sums to choose from based on your preference and needs for the amount of monthly payout.
Image source: https://www.cpf.gov.sg/Assets/members/Documents/CPF_Retirement_Booklet.pdf
You will be placed on the CPF LIFE scheme if you have at least $40,000 in your RA at 55 years old or $60,000 at 65 years old. If you are not on the scheme, you can opt to participate at any time before 80 years old.
The CPF LIFE scheme comprises 2 types of CPF LIFE plans which you can select from - LIFE Standard Plan (default plan) or LIFE Basic Plan. The former gives you higher monthly payouts but less bequest for your beneficiaries, and vice versa for the latter. You can choose your preferred CPF LIFE plan only when you wish to start your monthly payouts anytime between 65 and 70 years old. Note that for each year deferred from your eligible payout age of 65, your monthly payouts increase by about 6% to 7%.
Image source: http://www.straitstimes.com/business/invest/choosing-the-right-cpf-life-plan
CPF tip from GET.com: You can transfer any extra CPF savings above the Basic Retirement Sum to your spouse's account, so that you can both earn the extra interest paid on your first $60,000 of combined CPF savings.
You can also make CPF or cash top-ups to your own or your loved ones' RA to enjoy higher monthly payouts. What's great is that you get to enjoy tax relief for cash top-ups up to the existing Full Retirement Sum.