With the Central Provident Fund (CPF) enhancements making headlines in recent months, more CPF members are waking up to the fact that there is a viable investment tool in their backyard.
The low-yield environment makes even the Ordinary Account rate of 2.5 per cent appear attractive, not to mention the Retirement Account (for those above 55), which attracts up to 6 per cent interest.
The chatter these days seem to be skewed towards how people can put more into CPF to grow their nest egg, rather than withdrawing.
To recap, the first slew of recommendations by the CPF Advisory Panel was announced early last year. They involve different payout options and the flexibility of deferring payouts up to age 70 so as to receive more cash later. Last month, the last few recommendations, which include a CPF Life escalating payout option, were announced.
Despite the CPF Board’s publicity campaign and articles written about the changes, some still find the CPF schemes complex and difficult to understand, judging from queries to The Sunday Times, as well as those posed during the question-and-answer session at the CPF Retirement Planning roadshow on Aug 27.
Here are six little-known facts about the CPF:
1. TOPPING UP YOUR CHILDREN’S CPF ACCOUNTS
Every Singaporean newborn today has a CPF account set up for him or her by the Government for the purpose of receiving the $4,000 Medisave grant.
For children who are Singapore citizens or permanent residents, a CPF account will be automatically created when a first top-up or CPF contribution is received.
Some wealthier CPF members or those with excess cash have opted to use the CPF as a legacy for their children or grandchildren by topping up their Special Accounts the moment they are born.
In fact, you can contribute up to the prevailing Full Retirement Sum (FRS) of $161,000 into the newborn’s Special Account in one go, under the Retirement Sum Topping-Up Scheme.
Some members have already done so.
Imagine the power of compounding over 55 years.
Assuming the Special Account’s floor interest rate remains at 4 per cent, your initial contributions would compound to some $1.5 million over the next 55 years.
Another way of topping up your children’s CPF accounts is to use the Voluntary Contribution Scheme, currently capped at $37,740 a year.
Contributions can be made to the Medisave Account only (up to the Basic Healthcare Sum) or can be split among the Ordinary, Special and Medisave accounts.
However, bear in mind that unlike cash top-ups to other loved ones like spouses, parents and siblings, you do not receive any tax benefit for topping up your child or grandchild’s CPF accounts.
Of course, not everyone will be comfortable with locking up funds for 55 years.
Some financial experts recommend that it would be better to invest the same amount in equities and low-cost index funds – given the very long investment horizon that a young child has – which should reap potentially higher returns.
2. CPF AS A FIXED DEPOSIT OR FIXED INCOME ALTERNATIVE
Some CPF members have taken to actively transferring their Ordinary Account savings to the Special Account to earn the higher interest rates.
But if your Special Account balance – including savings withdrawn under the CPF Investment Scheme – has reached the prevailing FRS, you would be unable to do further top-ups.
In the chase for yields, even the Ordinary Account interest rate of 2.5 per cent a year is not to be sniffed at, particularly if you are comparing it with fixed deposit rates which have fallen to paltry levels. Even the average annual returns of some bonds, such as the Singapore Savings Bonds, have dipped below 2 per cent.
Some insurance policies with guaranteed returns and a fixed tenure – usually three to five years – also pale in comparison with the Ordinary Account interest rate.
If you are below 55 and are confident of setting aside the requisite retirement sums at 55, you can consider the Ordinary Account as an alternative fixed deposit instrument but with less liquidity. Because of the lack of liquidity, this works better for those who are close to 55 and/or are confident they have no need for the cash.
For example, if you are 53 years old, you can park your spare cash savings in the Ordinary Account and consider it as a two-year fixed deposit. This is because if you are able to set aside sufficient savings in your Retirement Account, you can withdraw the rest at age 55 or later, whenever the need arises.
And you can still use the Ordinary Account savings for other investments under the CPF Investment Scheme and to purchase properties, after setting aside $20,000 in your Ordinary Account.
3. CASH REFUNDS FOR CPF SAVINGS USED FOR PROPERTY PURCHASES
One way of putting cash into your Ordinary Account is to do so via a full or partial refund of the CPF savings that you had previously withdrawn for property purchases plus the interest accrued on them.
Some members wrongly believed that they could refund the CPF savings used for their properties only upon the sale of these properties.
Even if the properties are unsold, you can make cash refunds by filling out a CPF form and indicating which property you are making the refund for. However, you should note that such cash refunds are irrevocable.
4. ZERO ORDINARY ACCOUNT BALANCE
Some members wanted to know if it is possible to deplete the Ordinary Account to zero when transferring CPF savings from that account to the Special Account, and still earn the higher interest rates.
This question was raised during the CPF Retirement Planning roadshow. Mr Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, responded that it is possible.
For members below 55, when the Ordinary Account has zero balance, the first $60,000 in the Special Account savings will attract 5 per cent while the remaining balance will enjoy 4 per cent interest.
5. CPF WITHDRAWALS
For members who are 55 and older, have the requisite retirement sums in their Retirement Account, and still have balances in both the Ordinary and Special Accounts, withdrawals will be made from the Special Account first before the Ordinary Account.
CPF said that this is because CPF members may still have commitments such as housing, education and investment after turning 55.
The board says: “As Ordinary Account savings can be used for continued participation in schemes after 55, the withdrawal sequence is catered to the needs of the majority of Singaporeans. Nonetheless, members who wish to benefit from CPF attractive interest rates have the option to top up their Retirement Account under the Retirement Sum Topping-Up Scheme.”
6. FREQUENCY OF CPF WITHDRAWALS CPF
Members are not restricted to only one withdrawal a year. Members who have withdrawable balances in their CPF accounts may submit an application any time and the Board will assess the application.
The amount of money that the member may withdraw will still be based on the applicable withdrawal rules and it does not change the amount of savings that can be withdrawn by the member.
This story was originally published in The Straits Times.