According to the Melbourne Mercer Global Pension Index, Singapore’s pension system ranks in the top 10 globally. The Central Provident Fund (CPF), which is a key component of Singapore’s strategy in taking care of our elderly, has the right to claim a large proportion of the credit.
For those of you who don’t already know this, employers in Singapore typically contribute up to 17% of our salary to our CPF accounts. We, ourselves, contribute up to 20% of our salaries to our CPF accounts.
The CPF is an internationally acclaimed pension system that we can choose to further utilise by topping-up our accounts. We highlight five reasons why it might make sense to do so. As a caveat, we’ve also previously written on why you may not want to do this and you can read about the reasons in the link below.
#1 Virtually Risk-Free Investment – Capital And Returns Are Guaranteed
Topping-up your CPF Special Account (SA) is a virtually risk-free investment. What this means is that no matter the state of the economy or investment climate, your CPF monies and its returns are guaranteed.
This guarantee is provided by the Singapore government, one of a handful of triple A rated countries in the world, which makes it virtually risk-free. Most other types of investments, even if they are guaranteed by companies or other entities, come with comparatively higher risk.
#2 Good Interest Returns
Any funds that you top-up into your CPF Special Account (SA) will earn you a minimum return of 4.0% per annum (p.a.). This represents a relatively good rate of return considering that it is virtually risk-free.
In addition, the first $60,000 in your CPF accounts (of which up to $20,000 can come from your Ordinary Account) earns an extra 1.0% in interest. If you’re just at the beginning stages of your career, you will unlikely have more than $60,000 in your CPF accounts, and even if you’re a few years into your career, you may not have $40,000 in your SA or Medisave Account to earn the extra 1.0%. This means if you top-up your SA account early enough in your career, you will enjoy up to 5.0% in returns.
Deposits in local banks offer another form of virtually risk-free investment. Savings accounts pay as little as 0.05% p.a., and even high-interest rate savings accounts, which advertise annual returns of up to 3.5% p.a., usually end up giving you under 2.0% p.a. as there are many hoops you have to jump through to unlock the full amount. Fixed deposits offered by most of the banks right now do not exceed the 1.25% p.a. mark.
Singapore government securities (SGS), such as bonds, treasury bills and the Singapore Savings Bonds (SSB) offer yields of 1.74%, 1.32% and up to 2.16% respectively. These are also considered virtually risk-free investments.
If we look at equity investments, the Straits Times Index, comprising the 30 largest and most traded stocks listed in Singapore, has delivered a one-year return of 23.8%. However, when we look at a longer time horizon, this falls to 4.2% p.a. over a three-year period, 5.0% p.a. over a five-year period and just 1.8% p.a over a 10-year period. Some of us may not be able to navigate through this volatility and unpredictability as well as others.
#3 Tax Savings
You can claim tax reliefs of up to $7,000 on cash top-ups to your SA, as well as a further $7,000 on cash top-ups to your loved one’s SA account. By lowering your chargeable income by up to $14,000, you may also fall into a lower tax bracket and enjoy even greater tax savings.
Everyone has to have a plan to save for their retirement, and if your plan is to stash money in a savings account or invest in a relatively safe way, you may be better off topping up your, and/or your loved one’s, SA.
The returns you earn on these savings, as well as the tax savings you benefit from, will go a long way towards accumulating your retirement nest egg and enhancing your CPF Lifelong Income For Retirement (LIFE) payouts when you turn 65.
#4 Forced Savings For Retirement
If you don’t have a plan for your retirement, this is a good exercise to start thinking about it. You can start by calculating how much you will eventually have by contributing a certain amount each year, or even work backwards from a target amount you hope to have by 65.
Besides this, you should also be thinking about what else you should be doing to build your retirement nest egg. You may consider topping up your spouse’s SA account rather than get them to do it to lower your household’s overall tax commitments.
You could also choose to top-up less money into your SA account and instead channel these funds into stocks or bond investments that offer superior returns over the long-term or greater liquidity if you think it’s necessary. This may make sense if you have a longer time horizon to ride out the market risk in such investments.
#5 Your Money For Life
One other thing to note is that your CPF monies are yours to keep for your retirement even if you’re beset with financial problems and have to declare bankruptcy at some point in the future. These funds are protected from potential creditors.
This is especially pertinent for businessmen, entrepreneurs and freelancers who may not have as much job security as other full-time employed persons. It is also a good choice for people who have high levels of debt and leverage, whether it is for their work, investments or even home.
However, you have to understand that any cash top-ups into your SA can only be used for your retirement, in the form of bigger CPF LIFE payouts in the future, and not for any other purposes, including mortgage repayment, education, investments or insurance payments.
This Is A One-Way Transaction
Once you do this, you’re committed to the transaction. The next time you’ll see this money again is when you turn 65 and start to receive monthly payouts from CPF Life. Remember you can’t touch this money even at 55 as it can only be used to increase your CPF LIFE payout.
Of course, if you exceed the basic retirement sum, you may get to withdraw a portion of your money at 55 – that’s still a long way to go if you’re just starting out today. The slight technicality is that you’ll be withdrawing the funds that were contributed as part of your wages through the years rather than funds that were topped-up into your CPF SA.
Another consideration you may also have is that you may have other requirements for your funds – to pay for your wedding or other forms of entertainment – or even to tide you through retrenchment or afford you the flexibility to have one parent stay home after having a child.
If you’ve been prudent with your money in 2017, and have additional savings beyond what you’ve set aside to achieve your financial goals as well as emergency funds, you can consider topping up your CPF SA.
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