Remember last year’s uproar when the Government announced that the Central Provident Fund (CPF) Special Account (SA) for those aged 55 and above would cease to exist starting in early 2025? Well, that time has finally come.
You’ve probably already received a hardcopy letter, email or text message informing you about the SA closure, sometime in late January. For anyone who’s been sitting on their hands while deciding what to do with their money, it’s time to start weighing your options.
But first, some background. The closure of the SA was announced during Budget 2024, where it was said that the funds within would be transferred to the person’s Retirement Account (RA), up to that person’s Full Retirement Sum (FRS) for his cohort (for this year, the sum is $213,000).
The statutory board explained that the move was to better align CPF interest rates to the nature of CPF savings in each CPF account.
In other words, savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate.
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Most of the unhappiness centred around the loss of what was seen as a savings account with capital protected and decently high, guaranteed yields – though to be fair, the move was a long time coming and in fact, CPF and the Monetary Authority of Singapore (MAS) had already issued a strong hint a few years ago.
We’re talking about the practice of SA shielding, which many people believe to be the main reason for the move.
What is SA shielding?
Everyone who contributes to CPF knows that the funds are divided into the Ordinary Account (OA) which earns a minimum interest of 2.5% per annum, the SA which earns a minimum interest of 4% per annum and the MediSave Account (MA) which also earns 4% per annum.
The OA and MA are used for mortgage and medical payments respectively, whilst SA funds are earmarked for retirement. If you wish to use your OA for investment, you have to maintain a minimum balance of $20,000. The amount doubles to $40,000 when it comes to using your SA.
When a person turns 55, CPF will set up a fourth account, known as the Retirement Account (RA). CPF will attempt to sweep the Full Retirement Sum (FRS) into the RA using money first in the SA, and if there’s not enough, then the balance will be taken from the OA. Recall that for 2025, the FRS is $213,000.
Now let’s assume a person who is nearing 55 has $150,000 in his SA and wishes to indulge in SA shielding. A few days or weeks before his 55th birthday, he uses $110,000 of his SA to buy a financial instrument, leaving the required minimum of $40,000 in his SA.
When he turns 55, CPF can only sweep $40,000 into his RA from his SA and would then have to take the remaining $173,000 (S213,000 minus $40,000) from his OA.
Once the RA has been set up, this person then sells the financial instrument – hopefully with no loss and preferably at a profit – and the funds would then be returned to his SA, where they would continue to earn 4% per annum.
In other words, he has “shielded” the majority of his SA from being used to set up his RA and forced CPF to take most of the FRS from the lower-yielding OA.
By doing this, his SA in effect becomes a high-yielding deposit account that earns 4% per annum which could previously be tapped for withdrawals at any time after 55.
Is CPF SA closure due to SA shielding?
This was not explicitly stated as a reason for the SA closure after age 55. However, back in 2021, CPF said on its website that it was aware that SA shielding was being practised and warned against it.
"Financial advisers and insurance brokers who promote 'SA Shielding' without highlighting these risks may be guilty of mis-selling, and anybody with knowledge of them should report them to the Monetary Authority of Singapore."
On 25 July 2021, The Straits Times highlighted this post and said it could very well mean that steps would be taken to stop SA shielding. As it turns out, this has now taken place, around four years later.
The article correctly pointed out that:
"The SA was never meant to hold funds for the long haul: It earns a higher interest so that members can save enough to join CPF Life with at least the full retirement sum".
"Also, the rule for allowing the withdrawal of funds in SA (for investment) is meant to give savvy investors a chance to possibly earn more money in long-term investments, and not to be used as a ploy to retain money in the SA instead".
What this means if you are below 55
If you are aged below 55, this move does not affect you. However, you could consider topping up your SA to the maximum amount, which for 2025 is the prevailing FRS of $213,000 in order to earn the 4% compound interest and boost your retirement savings.
If you don’t have that amount of funds, you could always top up your SA with whatever you can afford, perhaps a few hundred dollars every month.
"So the key to earning higher interest from the CPF is to do it the proper way, which is to ensure that you maintain high balances in all your accounts".
What this means if you are above 55 and still working
There are two possibilities for those above 55 and who are still working.
First is those who, after their SA is closed, have managed to set aside their cohort’s FRS in their RA. For these individuals, their subsequent CPF contributions will go into their OAs and MAs.
In other words, what would have previously gone into their SAs will now go into their OAs.
Second, for those who did not manage to attain their FRS, then whatever would have gone into their SAs previously will now go into their RAs until their FRS is reached.
For those turning 55 in 2025 and have the FRS of $213,000 in their RAs this year, this will grow to around $318,000 in ten years. If they opt to start their CPF LIFE payments then, they will receive around $1,590 – $1,710 per month for life under the default CPF LIFE Standard Plan.
What else can a CPF member above 55 do to earn higher interest?
Members can consider topping up their RAs to the new Enhanced Retirement Sum (ERS), which for 2025 is $426,000, either by cash or by transferring funds from their OAs.
If this is done by a member turning 55 this year, the $426,000 will grow at 4% per annum to more than $500,000 by the time he turns 65. If he opts to start his CPF LIFE payments at that age, he will receive $3,100 – $3,300 per month under the CPF LIFE Standard Plan for the rest of his life. Note however, that transfers into the RA are irreversible.
If you have the need and are willing to take on investment risk in suitable products, you can invest your OA funds (above the $20,000 threshold) under the CPF Investment Scheme (CPFIS) in options like T-bills, fixed deposits, insurance plans, unit trusts, and – a popular option in Singapore – REITS, short for real estate investment trusts.
Your investment choices will depend on your risk tolerance, time horizon, financial knowledge, and investment objectives. For seniors, it would not be advisable to take on too much investment risk, so the focus should be on safer products like T-bills and Singapore Savings Bonds in order to preserve your capital and as far as possible, eliminate risk of loss.
If in doubt, it’s best to consult a licensed financial adviser.
