Knowing how to manage your finances is a key to a successful life and usually, it starts with knowing where your money goes to - but do you really know how your money is being managed every month? Many of us think that “Oh, 20% of our salary goes into our CPF for future planning right, cannot touch mah so don’t need to think about it”. However, that is the wrong mindset to have - taking charge of your finances means knowing how much CPF you have gathered, and how much of it goes into your respective accounts like Medisave to better plan around rainy days or huge crises.
Knowing how to navigate around the topic of CPF is tough, but we are here to break it down into simple examples for you to have a clearer understanding! Knowledge is power and knowing more about CPF will mean better planning, better management and a better life!
First of all, why do we have CPF?
The Central Provident Fund (CPF) is a crucial way to ensure that all Singaporeans have sufficient funds in their own account for major events such as paying for critical illness treatments, purchasing of a home and funding your child’s school fees. It also serves as a fund for retirement, ensuring that you can have a sum of money to live comfortably in after you retire. This works towards our government’s goal of ensuring that every Singaporean is able to practice self-sustenance, which is crucial in order to not create a dent on our economy and our society.
Hence, this involves taking a fixed percentage of your official salary away into the CPF account, for you to use them for specific purposes should you desire to do so. If not, they are kept as a retirement fund to safeguard your future interests. This percentage is automatically deducted as CPF contributions every month and deposited into your CPF accounts.
What is the percentage of CPF contribution rates?
The amount that the employer withholds from your official account depends on your age, but do note that there is also an employer’s contribution. This is the amount that the employer is also required to pay into your CPF account apart from your official salary.
For individuals 55 years and above, do note that in the next 10 years, CPF contributions will be progressively adjusted upwards to meet the full contribution rate of 37% (employee + employer) and then proceed to drop again after 60 years of age.
For those that are self employed, do note that CPF contributions shall be voluntary and any amount you make into your CPF account will be sourced from your own funds. However, this excludes Medisave contributions, since that would be required when filing for personal taxes annually.
Example: 35 Years Old Man, George, With A Monthly Salary of $6,000.
According to the table, 20% of George’s salary will go to your CPF account, which will be $6,000 x 20% = $1,200. Therefore, he will be taking home $4,800. On the employer’s side, his employer will be depositing an additional $1,020 (17%) to his CPF account every month as well. Therefore, the total amount going into his CPF account will be = $1,200 (20%) + $1,020 (17%) = $2,220.
However, is there a cap for the 20% CPF contribution incurred?
Yes, there is a contribution cap and it is capped at $6,000 under the Ordinary Wage Ceiling. This means that only the first $6,000 of your monthly salary is subjected to CPF contributions. However, there is also Additional Wage Ceiling applied to annual bonuses, extra commissions and other monetary gains that are not considered under monthly salary (i.e. not under Ordinary Wage Ceiling). The Additional Wage Ceiling is capped at a total of $102,000 - Ordinary Wages for the year.
Going back to the example of George, his annual Ordinary Wage = $6,000 x 12 = $72,000. So if he earns any extra bonus or commission, the amount that will incur extra CPF under Additional Wage Ceiling = $102,000 - $72,000 = $30,000. Any extra bonuses more than $30,000 for George will not be liable for any CPF contributions.
What happens to the amount in my CPF account?
Well, your money doesn’t just sit there at one place - in fact, it actually branches out into a few sub-accounts for different purposes. After all, if you have $100,000 in your CPF, it doesn't mean that you can spend the whole $100,000 in that account to buy a house either. Because if that was the case, then what happens if you suffer from critical illness (touch wood!) after buying the house?
Therefore, CPF is split into the following accounts with their respective uses:
So, how much can I spend for specific purposes?
This brings to question what are the monthly CPF allocation rates to each of these accounts - well, this is how it works:
As you can see, a larger percentage of CPF is allocated to the Ordinary Account (OA) when you are young, since there is more money spent from OA for housing, investing and higher education. However, as you progress further with age, more money will be allocated to Medisave for critical illnesses and prepare you for impending retirement.
How exactly does it work: using your money in CPF accounts
Using OA funds to buy a home:
You are allowed to use the money in your OA to pay for a portion of your property, depending on the withdrawal limits and excluding the amount that must be paid by cash.
In addition, you are also allowed to use your OA to pay monthly home loan repayments, providing you with greater breathing space as well.
Note: Remember to apply for CPF Housing Grants and other monetary assistance schemes if you are to meet the respective criteria! This can help you lighten the amount required to pay for your property.
Using OA funds for higher education:
Under the CPF Education Scheme, it allows you to use the funds from OA to pay for you or your family member’s tuition fees, which covers ITEs and polytechnics. It also includes local university fees as well (that are a tad more expensive!).
Using OA funds for investment:
Under the CPF Investment Scheme, you can also use some of the OA and SA funds for investment of shares, Unit Trusts, investment-linked insurance, Singapore Government Bonds and ETFs. However, you need to be cautious of the earning rates since they may or may not be able to beat CPF’s interest rates that come at a lucrative percentage (refer to the table below).
Using Medisave funds to buy Integrated Shield Plans:
There are also other options that you may like to explore, but that would be depending on your preferences as this is just a guide to what most Singaporeans prefer to spend their money on, if not for retirement.
Another item we would like to note would be using your Medisave account to buy an integrated shield plan, which are basically private health insurance plans meant to boost your MediShield Life for greater health security. Since part of the premiums can be paid for with Medisave, it is usually recommended.
CPF retirement sum - how does it help you with your retirement?
There has been an ongoing discussion about the CPF Retirement Sum and its progressively higher amount as the years go by. Back when it used to be CPF Minimum Sum, there were contention over its name and therefore changed to be called “CPF retirement sum”.
Under the old CPF Retirement Sum Scheme (aka CPF Minimum Sum), it will need you to deposit a minimum amount in your CPF account upon retirement, with your monthly CPF payouts calculated based on your RA funds (see above on what is RA). However, once your RA becomes 0 (i.e. you run out) then what happens? How to live?
With the rising cost of living, there has been increasing worries about outliving your CPF savings. So the new CPF LIFE (Lifelong Income For The Elderly) is an enhanced version to ensure that you will have secure payouts for the rest of your life. You will automatically be enrolled into this CPF LIFE scheme if you hit any of these conditions:
If you don’t fit into these requirements but wish to apply for CPF LIFE, you can do so by logging into your CPF Online Services Website through your Singpass to make an online application separately. Also, do note that CPF LIFE monthly payouts starts from the age of 65 to 70 years old onwards.
CPF LIFE Scheme - Calculation of monthly retirement payouts
The monthly payout amount depends on how much you have in your CPF Retirement Sums. That means that the total amount you have inside will determine how much you get after - depending on whether the money inside hits
Basic Retirement Sum (BRS)
Full Retirement Sum (FRS) which is = BRS x 2
Enhanced Retirement Sum (ERS) which is = BRS x 3
Regardless of the amount you have, when you turn 55, your OA and SA will merge into RA (Retirement Account). You can withdraw a lump sum from it provided that you leave the required retirement sum in your RA for your future retirement. The required retirement sum has been increasing over the years due to rising cost of living, and you can check the current amount as of 2017 to 2022:
With the three different type of schemes, depending on which scheme you have saved enough for, you will get something within the range of the following:
Other things you should take note of
#1 What if I cant’ hit the Basic Retirement Sum?
If that happens, you will still receive monthly retirement payouts don’t worry! However, the amount you receive will be pro-rated based on what you actually have
#2 Can I choose Basic Retirement Sum Scheme myself? Are there restrictions in place?
Yes, note that since choosing Basic Retirement Sum means you can withdraw a larger sum of RA savings out, it is a riskier option that the government recommends against. Hence, you will usually be required to pick the Full Retirement Sum instead. However, there are ways to get past that.
If you really want to choose the Basic Retirement Sum, note that you can do so if you are a property owner. However - take note! - it will treat your property as a safeguard for your retirement instead. This means that once you sell your property away (your “safeguard”) then you will need to deposit an amount back into your CPF RA from the proceeds of the property sale.
However, if you do not have a property, you will usually be required to keep a full retirement sum for financial security purposes.
Now, on to the juicer topic: How much interest does CPF get?
Since the government understands that storing your funds in a fixed place would be meaningless in the face of inflation, they also offer interest rates to hedge against the inflation over the years. Currently, the interest rates are:
Since SA has a higher interest rate at 4%, many of you might wonder: Then keep OA for what, might as well transfer them all to SA to earn more hor? Even though that is possible, know that money transferred into SA cannot be withdrawn back out. You can use it for all the things you can for OA - which means you cannot use it to buy a house, fund your or your family members’ education etc. That means you should only transfer money that you really don’t need to use into SA!
Extra things to note:
You can earn an additional 1% interest on the first $60,000 of your account balances. Your OA can take up only $20,000 out of the $60,000 to enjoy this though.
If you are 55 years old or above, you can also get an additional 1% interest on the first $30,000. Again, your OA can take up only $20,000 out of the $30,000 to enjoy this.
By giving out greater interest rates if you keep a certain amount of money in the CPF accounts, the government encourages you to keep more money in SA and RA to make up to the $60,000 or $30,000 amount.
Sounds too good to be true to earn such high interest? Note that you cannot put everything you have in your bank there and wait for money to grow - the annual limit to CPF contributions is currently at $37,740.
Finally: what happens to your CPF when you pass on?
Since it's your own money, it makes sense that you should be able to draw up a will to pass it on to your family members, right?
Unfortunately, CPF works a little differently - it can’t be distributed by the will you draft up. It will be distributed according to the rules of intestacy (ie. to your family members) by default, unless you actually make a CPF nomination.
CPF Nomination allows you to specify who receives these leftover CPF savings, exactly like a will but a separate process.
Therefore, to be on the safe side, you may opt to submit a CPF nomination form with the supporting documents required. You can choose to mail it by post or do it in person at a CPF Service Centre depending on your preference.
Want to know more? Need specific advance or even investment enquiries?
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