According to the Mercer CFA Institute Global Pension Index, Singapore’s pension system – mainly based on CPF – ranks in the top 10 globally. For those who don’t already know, employers in Singapore contribute up to 17% of our salary to our CPF accounts. We contribute up to 20% of our salaries to our own CPF accounts. Throughout the time that our CPF monies are within the system, the government pays us a base interest rate of between 2.5% (on our Ordinary Account) and 4.0% (on our Special and MediSave Accounts) each year.
Moreover, we can choose to further optimise our CPF savings by topping-up our accounts via several different methods. Primarily, we use the Retirement Sum Topping Up (RSTU) Scheme to contribute more to our Special Account (SA) – meant for our retirement.
We highlight five reasons why it might make sense to top-up our Special Account. 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 Capital And Returns Are Guaranteed
Topping-up our 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, our 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. 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 we top-up into our CPF Special Account (SA) will earn us 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. Of course, there are limitations on withdrawing these funds.
In addition, the first $60,000 in our CPF accounts (of which up to $20,000 can come from our Ordinary Account) earns an extra 1.0% in interest. If we are near the beginning stages of our career, we will unlikely have more than $60,000 in our CPF accounts. Even if we’re a few years into our career, we may not have $40,000 in our SA or MediSave Account (MA) to earn the extra 1.0%. This means if we top-up our SA account early, we will enjoy up to 5.0% in returns on a bigger sum of money in our CPF.
Comparatively, 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 over 7% p.a., usually end up giving you about 3.0% to 4.0% p.a. as there are several hoops you have to jump through to unlock the full benefits. Fixed deposits offered by most banks right now also offer around the 3.0% to 4.0% p.a. mark. However, we will have a reinvestment risk, as fixed deposits typically mature in several months and up to 2 to 3 years.
Singapore government securities (SGS), such as treasury bills (T-bills) and the Singapore Savings Bonds (SSB) offer yields of 4.28% and up to 3.26% respectively. These are also considered virtually risk-free investments. However, there may be some reinvestment risk. With T-bills, we have to reinvest our savings every 6 months to 1 year. On top of that, we may not get the full allocation, which means part of our funds may earn significantly lower interest. While the SSB lasts up to 10 years, we may not earn the market interest rate – if interest rates continue to go up.
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 12.1%, but looking at a longer timeframe, its 5-year return is 2.67% and a 10-year return of 3.93% per annum. Some of us may not be able to or do not want to navigate through volatility and unpredictability to achieve a return that is barely higher than what our CPF SA would have paid us over 10 years.
Moreover, the CPF Special Account pays interest rates that are based on a premium to the market interest rate. This means that as interest rates rise in the market, the Special Account will continue to pay a premium to the market rates. There may be a lag effect as CPF rates catch up to market rates.
#3 Tax Savings
We can claim tax reliefs of up to $8,000 on cash top-ups to your SA, as well as a further $8,000 on cash top-ups to your loved one’s SA account. By lowering our chargeable income by up to $16,000, we may also fall into a lower tax bracket and enjoy even more significant tax savings.
Everyone has to have a plan to save for our retirement, and if our plan is to stash money in a savings account or invest in a relatively safe way, we may be better off topping up our, and/or our loved one’s, SA.
The returns we earn on these savings, as well as the tax savings we benefit from, will go a long way towards accumulating our retirement nest egg and enhancing our CPF LIFE payouts when we turn 65.
#4 Forced Savings For Retirement
If we don’t have a plan for our retirement, this is a good exercise to start thinking about it. We can start by calculating how much we will eventually have by contributing a certain amount each year, or even work backwards from a target amount we hope to have by 65.
Besides this, we should also be thinking about what else we can do to build our retirement nest egg. We may consider topping up our spouse’s SA account rather than getting them to do it to lower our household’s overall tax commitments. This is depending on our spouse’s income (if any).
We could also choose to top-up less money into our SA account and instead channel these funds into stocks or bond investments that offer superior returns over the long-term or greater liquidity if we think it’s necessary. This may make sense if we have a much longer time horizon to ride out the market risk and/or have a greater appetite for risk.
If we contribute to our CPF, we cannot invest it. We may also contribute to our Supplementary Retirement Scheme (SRS) to save on tax, while also being able to invest in stock and bonds and government securities.
#5 Your Money For Life
One other thing to note is that our CPF monies is our own to keep for retirement even if we’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, we have to understand that any cash top-ups into your SA can only be used for our 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 we top up our SA, we’re committed to the transaction. The next time we’ll see this money again is when we turn 65 and start to receive monthly payouts from CPF Life.
Another consideration we may also have is whether we may have other requirements for our funds – such as to pay for our wedding, home down payment, investing in a business or entertainment – or even to tide us through retrenchment or afford us the flexibility to have one parent stay home after having a child.
If we’re been prudent with our money, and have additional savings beyond what we’ve set aside to achieve our financial goals as well as emergency funds, we can consider topping up our CPF SA.
This article was first published on 30 Nov 2017 and has been updated with latest information.
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