There was a bit of a hue and cry when the latest CPF changes were announced at the Government’s Budget in February.
Most of the unhappiness was directed at news that from 2025, the CPF Special Account (SA) which pays around 4% per annum will be closed for those above the age of 55.
Whatever funds there are in an individual’s SA will be transferred to their Retirement Account (RA) to make up their cohort’s Full Retirement Sum (FRS) (ie. the FRS prevailing in the year they turned 55) and any balance in the SA will be transferred into their Ordinary Account (OA) which pays a base rate of 2.5% per annum.
What upset many people is therefore the loss of interest of around 1.5% that could have been earned if the SA is kept open.
The public should understand that
a) the changes reinforce the underlying principle of CPF, which is that it is first and foremost for retirement and not necessarily for investment; and
b) it is possible now to get a much higher monthly payout in retirement than before.
a) the changes reinforce the underlying principle of CPF, which is that it is first and foremost for retirement and not necessarily for investment; and
b) it is possible now to get a much higher monthly payout in retirement than before.
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CPF is first and foremost for retirement and not necessarily for investment;
Every individual who contributes to CPF knows that the money is channelled into three accounts – the OA, SA and the Medisave Account (MA).
The purposes of the three accounts have always been stated as: the OA to help pay housing loans, the SA for retirement and the MA for medical needs.
As noted earlier, the base interest rates for the OA and SA are 2.5 and 4% respectively. The MA also earns 4%.
It is important to recognise the fundamental rationale for the existence of the SA —it is for retirement.
At 55, a fourth account known as the RA is created. The default sum to be swept into the RA is known as the Full Retirement Sum or FRS, which will be $213,000 next year.
Because it is the SA which is intended for retirement, CPF will first use all the money in a person’s SA to place into the RA. If there is enough in the SA to set aside the FRS, then well and good. If not, the SA is first emptied and then the remainder to make up the FRS is taken from the OA.
- What is "SA shielding"?
In recent years, a practice known as “SA shielding” grew in popularity to circumvent the normal process of RA creation. Basically, it involves “shielding” the SA from being swept into the RA and forcing CPF to use the lower-interest bearing OA to form the bulk of the FRS.
This is how it works:
Current rules require at least $40,000 to be retained in the SA if a person wishes to use this account for investing.
Assuming a person has $200,000 in their SA at 55 which is a very realistic sum for someone who has worked 30 years, what this person would do would be to use $160,000 to invest in an SA-approved product just before turning 55.
This means that when their RA is created, CPF can only sweep the $40,000 that was left in the SA, and then has to take the remainder from the OA when setting aside the FRS.
Once the RA has been created, the person that cashes out the investment and the $160,000 plus any profit from the sale of the investment then flows back to the SA.
The net outcome is that they continue to earn the base 4% interest on the $160,000 whilst their RA has been set up using mainly funds from the lower-interest bearing OA.
Assuming the person managed to set aside the FRS, then the SA effectively becomes a higher-interest deposit account because the money can be withdrawn anytime.
Furthermore, if the person is still working after 55, the SA will continue to grow with the normal monthly employer-employee contributions.
- 2. What’s the problem with SA shielding?
The problem with this strategy is that involves some degree of risk, plus it assumes that the person knows what he or she is doing.
The individual may not be totally familiar with how shielding works and may be recommended an expensive or higher-risk investment instrument (which would typically earn the adviser a higher fee) without understanding the risks or costs involved.
This could lead to potential investment losses that outweigh the benefit of SA Shielding.
In 2021, CPF posted a warning on its website, saying it was aware of the practice and warned that “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“.
At the time this was seen by many observers as a signal that action would eventually be taken to stop the practice of SA Shielding. Three years later, that has now come to pass with this year’s announcement that the SA for those above 55 will cease to exist from 2025 onwards.
The latest move reinforces that message that SA has always been earmarked as being for retirement and simultaneously puts a stop to a potentially risky practice of ‘SA Shielding’ which evolved to make the SA an investment asset instead.
Furthermore, with the latest changes, more people will have to set aside their cohort’s FRS, or at least put more money into their RAs, which means more people should enjoy greater retirement readiness.
With the CPF changes, it is possible to get a much higher monthly payout in retirement than before.
If someone manages to put next year’s FRS of $213,000 into their RA, this sum will grow to more than $300,000 at age 65 because like the SA the RA pays 4% per annum compound interest.
Those born in 1958 and after are automatically placed on an annuity scheme known as CPF LIFE (Lifelong Income for the Elderly).
At this point, note that CPF emphasizes the fact that CPF LIFE is an insurance product and not an investment product. Like all insurance products, protection is the central purpose. In the case of CPF LIFE, it is intended to protect you from outliving your savings.
A person can opt to start their CPF LIFE payouts from age 65 or defer until the final payment age of 70 in which case their payouts will be higher.
If they have managed to set aside the FRS at age 55, and if they opt to start payments at 65 and accept the default CPF LIFE Standard Plan, all their RA money goes towards paying the CPF LIFE premium, which means the entire RA balance enters an annuity pool, together with money from other individuals.
Their RA balance will then be used to pay them about $1,700 monthly, and once this is depleted, the interest from the pool will continue paying them for the rest of their lives.
It is possible to set aside a lower amount than the FRS. This sum is known as the Basic Retirement Sum (BRS) and is half the FRS. You can inform CPF that you wish to set aside only the BRS provided certain property-related conditions are met.
Next year’s BRS is half of $213,000 or $106,500. Note that if you set aside only the BRS at 55 your payout at 65 will be lower than $1,700, possibly only around $930 per month.
Alternatively, there is a higher retirement sum which is possible, known as the Enhanced Retirement Sum (ERS).
Until 2024, the ERS was three times the BRS, but among the changes announced this year is that this will be raised to four times the BRS from 2025 onwards.
This means that the upper limit for the RA next year will be (4 x $106,500) or $426,000 instead of the previous $319,500.
Since more can be placed in the RA, then logically a lot more money will be available when the person turns 65 and hence if the person opts for their CPF LIFE Standard Plan payments at that age, they will receive about $3,300 per month versus the previous $2,530.
What can seniors over 55 do next year?
- Option 1:
Once your SA is closed next year, consider transferring either cash or money from your OA to your RA to the new ERS of $426,000 to assure yourself of a monthly payment of at least $3,300 for life under the CPF LIFE Standard Plan from age 65. Furthermore, note that if you continue to top up your RA to the prevailing ERS each year thereafter from age 55 your payout will be more than $3,300.
- Option 2:
If you don’t wish to lock up funds in your RA, then keep your money in the OA to earn the 2.5% base interest.
- Option 3:
Invest your OA in approved investments under the CPF Investment Scheme. The risk-free investments which are available will be covered in a later article. When these investments are sold, the money goes back into the OA.
- Option 4:
Explore all the other top-up options: Seniors should check out all options for topping-up their CPF or the accounts of their loved ones to boost the latter’s retirement adequacy. In some instances, tax relief is available.
The latest changes to CPF are aimed at strengthening the fundamental rationale for the scheme, which is retirement adequacy.
