Like everyone else who just entered the workforce, we were all clueless about the CPF system.
We knew it existed and had different accounts for different purposes, but beyond that, it was just too daunting to dwell further. No one explained to us the details of what was needed to know.
So what are some of the most important things you need to know about the CPF especially when you embark on your working journey?
1. Ordinary Account, Special Account And Medisave
You probably would have heard through the media about terms such as CPF Life, Retirement Account and Basic Health Care Sum. There is so many things to know that it just confuse the heck out of you.
Forget about these. They are more for older folks.
The only 3 accounts you need to know and pay attention to are the Ordinary Account (OA), Special Account (SA) and Medisave.
Each month, you (the employee) will contribute 20% of your salary to your CPF while your company (the employer) will contribute another 17%.
Of this 37%, 23% will go to your OA, 6% your SA and 8% to your Medisave. This allocation would remain till the age of 35.
2. Interest Rate Is 1% Higher For First $60,000
In case you don’t already know, your CPF money automatically earns interest for you. Base interest rates are at 2.5% for the CPFOA and 4% for CPFSA and Medisave. However, the first $60,000 in your CPF account (with up to $20,000 from the OA) also earns an additional 1% interest.
Hence when you first start working, the money in your CPF account is actually actually earning 3.5% (for OA) and 5% (for SA and Medisave) per annum.
When you consider the fact that the returns are risk-free and that no transaction cost was incurred (unlike financial products offered by financial institutions), this seems to be a really good deal, particularly for people who do not have high-risk tolerance.
Read Also: Why Investing Your CPF Money Is A Bad Idea
3. Use Your Medisave To Buy A Integrated Shield Plan
Your Medisave account is meant to help you take care of hefty hospitalisation bill. In the event of any hospitalisation or surgery process, you are allowed to use money from your Medisave account to help cover the hospital charges.
Rather than allow your Medisave to accumulate money but be at this risk of incurring just one potentially expensive bill that could wipe up the years you have spend accumulating the funds, what makes better financial sense would be to allocate a small amount of your Medisave to buy a private integrated shield plan that would cover the cost of treatment.
For example, a person who earns $3,000 a month would have a Medisave contribution of $240 a month, or $2,880 per year.
An integrated shield plan that covers private hospital bills would cost between $277 – $383 per annum for people between the ages of 31 to 40. In other words, your annual premium for an integrated shield plan would cost you less than 2 months of your Medisave contribution.
By purchasing this coverage, you do not have to worry about potentially depleting your Medisave Account due to a hefty hospitalisation bill.
Read Also: What Is Medisave And Why Is It Important
4. Your Allocation Rate Will Change As You Become Older
The allocation rate (i.e. the amount that goes into the account each month) would change as you become older.
The first adjustment will happen after the age of 35.
|Age 35 and below||23%||6%||8%|
|Above 35 to 45||21%||7%||9%|
The adjustments are meant to be in line with the changing priorities as a person becomes older. A bigger focus is aimed towards funds in the SA (for retirement) and Medisave (for healthcare).
If you are buying a home and intend to budget such that you maximise the use of your OA account for home mortgage repayment, bear in mind that the allocation rate for your OA will be lower once you turn 36.
5. Top Up Money In Your SA To Get Tax Breaks
We are not encouraging tax evasion but whenever we have a chance to pay lesser tax to the government, we will be sure to seize the opportunity.
If 2015 is your first full working year and you are fortunate enough to draw a high paying salary with good bonus, you would be receiving a tax bill from IRAS next year. Let’s run through how much you might be expected to pay.
Assumption: Person earns $4,000 per month with 3 months bonus. Total annual gross salary would be $60,000.
On a typical year, you would be expected to pay $1,950 in income tax based on your salary (there is a 50% rebate on income tax for year 2015 only).
If you are not feeling too keen to contribute close to $170 per month to the government coffers, you can reduce your tax bill by providing a top up to your CPF Special Account. You get a dollar for dollar tax relief, up to a cap of $7,000.
If you maximise the full $7,000, you can effectively reduce your income tax to $1,460, or a saving of $490.
Not only that, you give a HUGE boost to your own retirement funds. Every $7,000 contributed to your Special Account today would give you a payout of $22,704 in 30 years time.
As for the $490 saved, we probably spend it on a couple of cheap trips to Batam or a few rounds of drinks at the pub. We don’t really care. It’s taken from the government anyway.
By providing top-up to your CPF account, you not only help build up a retirement portfolio early in life, you also save money on your own tax bill.
Image From Benjamin Lim. Used With Permission