Whether we want to or not, all Singaporeans and PRs who are employed will need to contribute to their Central Provident Fund (CPF).CPF consists of 3 different accounts. We have the CPF Ordinary Account (CPFOA), the CPF Special Account and Medisave. A fourth account – the CPF Retirement Account (RA) – will be created when we turn 55.
Among the various CPF accounts, our CPF OA provides the lowest risk-free base interest rate of 2.5% p.a. However, it’s also the CPF account that gives us the greatest flexibility on how we can use the funds.
In this article, we will focus on 5 practical ways in which you can utilise money in your CPFOA.
#1 Home Mortgage Payment
Among the five ways we will be discussing, this would be the most popular way that many Singaporeans are familiar about, and would utilise their CPFOA funds for.
Monthly contributions made to your CPFOA can be used to pay for your monthly mortgage or down payment required. This helps reduce or completely eliminate the need for homeowners to fork out any additional cash outlay to service their home mortgage.
Of the 37% contributions make to CPF (20% from employees, 17% from employers), 23% goes to a person CPFOA if they are 35 or below. This means a person who earns $3,000 per month would have a monthly contribution of about $690 to their CPFOA. You can use the entire $690 to offset mortgage repayment.
Funds used from our CPFOA are limited by both the Valuation Limit (VL) and the Withdrawal Limit (WL). The VL refers to the valuation of your property at the point of purchase or the price you paid for the property, whichever is lower. The WL is 120% of the Valuation Limit. You can read more about how the Valuation Limit and the Withdrawal Limit rules work.
#2 Investing In Stocks & ETFs On The Singapore Exchange (SGX)
Your CPFOA can be used to make investments in approved ETFs or stocks that are listed on the SGX. This list includes both the SPDR STI ETF and the Nikko AM STI ETF. You can invest any amount above $20,000 in your CPFOA account. You can check out the full list of stocks of ETFs here.
Standard brokerage charges apply when you buy or sell ETF units. In addition, you will incur a quarterly charge from the brokerage firm for maintaining stocks and ETFs that were bought using your CPF money. So do consider the long-term fee as it may not be worth investing if you are only committing a small CPF investment amount while having to incur the quarterly charges.
If you are keen to invest your CPFOA to earn a higher interest rate but lack the investment knowledge, or time required to do your own research, we can also consider investing through a low-cost, robo-advisory platform such as Endowus. Doing so not only allows you to have a robo-advisor to help manage your portfolio but also allows you to choose a suitable risk level that is aligned to your preference.
#3 Pay For Your Education Through The CPF Education Scheme
The CPF education scheme allows you to use your CPFOA money to pay the tuition fee for your own, your children or your spouse at approved institutions. Approved institutions include the local universities and polytechnics.
Do note that the person who used the CPF monies for education has to repay the full amount of CPF savings withdrawn along with the interest accrued. You can read more about how to apply for the CPF Education Loan Scheme here.
#4 Pay For Your Insurances
Some of us may be reluctant to spend too much money on life insurance coverage. However, you can make use of your CPFOA to help reduce the amount of life insurance coverage that you need to buy.
The Dependents’ Protection Scheme (DPS) is an opt-out life insurance scheme, which is automatically extended to eligible CPF members. The DPS provides a sum assured of $70,000 up to the age of 60. Premiums are extremely low, starting from about $18 per annum for those of the age of 34 and below. Premiums are paid via your CPF account so no cash outlay is required on your part.
Another type of insurance worth buying is the Home Protection Scheme (HPS). This works like a decreasing term insurance plan. The purpose of it is to ensure that your home loan is taken care of in the event of any unforeseen circumstances. Rather than buy a separate term insurance policy to cover your home loan, why not use the HPS instead and reduce the amount of life insurance coverage you need?
Similar to the DPS, you can use your CPF money to pay for the insurance premiums of the policy so this would be a practical plan to reduce the amount of insurance expense that you incur.
#5 Top Up Your Special Account To Earn More Interest For Retirement
While some of us may use our CPF money to buy a property, invest in stocks or pay for education, it is important to not forget that the primary purpose of CPF is to ensure that we have enough for retirement.
CPF members who want to earn extra interest on their CPF account can consider transferring money from their Ordinary Account to their Special Account for an extra 1.5% per annum. This may not seem much, but if you compound the sum over 20 years, you would be looking at a pretty sizeable amount.
Before proceeding on with the guide on transfer from OA to SA, it is important to remember that the process is irreversible. So you should carefully consider whether you need the funds in your OA to pay for other expenses first, before deciding to transfer it to your OA.
This article was first written on 27 November 2015 and has been updated.
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