Pros And Cons For Self-Employed Persons To Make Voluntary Contributions (VC) To All Your CPF Accounts

As a self-employed person in Singapore, there are certain money matters that you need to be responsible for and one of them is making your own CPF contributions.

Self-employed individuals with a net trade income above $6,000 a year must make mandatory CPF contributions into their Medisave Account (MA). Although contributions into their MA is compulsory, there is also an option to make Voluntary Contributions (VC) into all three CPF accounts – Ordinary Account (OA), Special Account (SA) and Medisave Account (MA) – instead of just the MA. However, you can’t make Voluntary Contributions to your OA only.

There is also a maximum amount of Voluntary Contributions you can make in a calendar year, which is the CPF Annual Limit of $37,740 minus mandatory contributions to MA. If both voluntary and mandatory contributions reach the CPF Annual Limit, no further Voluntary Contributions can be made.

CPF Voluntary Contributions follow the same allocated ratios as employed CPF members. 

Employee’s Age (Years)Ordinary Account (Ratio of Contribution)Special Account (Ratio of Contribution)Medisave Account (Ratio of Contribution)
35 & below0.62170.16210.2162
Above 35 – 450.56770.18910.2432
Above 45 – 500.51360.21620.2702
Above 50 – 550.40550.31080.2837
Above 55 – 600.46160.13460.4038
Above 60 – 650.21220.15150.6363
Above 650.080.080.84

Source: CPF

Based on the allocation ratios above, if a 40-year-old self-employed person tops up his CPF account with $10,000, he will receive $5,677, $1,891 and $2,432 into his OA, SA and MA respectively.

As a self-employed person, making voluntary contributions into the three CPF accounts is not mandatory but there are some advantages for doing so.

#1 Higher Interest Rate For Your Monies In CPF Accounts

Monies in our CPF accounts yield an attractive interest rate compared to interest rates from banks. For example, interest rate for the OA is subjected to a legislated minimum of 2.5% per annum. Our SA and MA also attract a current minimum interest rate of 4% per annum. Moreover, the first $60,000 in our CPF account (capped at $20,000 for OA) earns an additional 1% in interest with those above 55 earning an additional 1% of interest on their first $30,000. 

This means you can effectively get 2.5% to 6% interest per annum on money in CPF, while savings accounts in major banks give an interest rate of about 1% per annum or less these days.

However, you also need to realise that this is a one-way transfer. Once you make Voluntary Contributions to your CPF accounts, you cannot reverse the decision.

Read Also: Here’s How Our CPF Interest Rates Are Calculated – And Why Those Rates Are Almost Never What We Actually Earn

#2 It Allows You To Save On Taxes

Self-employed persons enjoy tax relief based on contributions made to their CPF accounts. According to the Inland Revenue Authority of Singapore (IRAS), tax relief for MediSave and Voluntary Contributions to CPF will be capped at the lower of:

– 37% of your net trade income assessed or

– CPF relief cap of $37,740 or

– Actual amount contributed

For example, if a self-employed individual earned a net trade income of $102,000 in the year of assessment, the income taxes that need to be paid will amount to $5,880 (assuming there are no other tax reliefs). If he voluntarily contributed the maximum amount of 37% of his net trade income into CPF (which is $37,740), then the taxable income will be reduced to $64,260. This amount attracts income tax payable of around $2,248, which is significantly lower than the taxes he would have to pay if he had not made the voluntary CPF contributions, saving him $3,632 in taxes.

Tax relief on Voluntary Contributions to CPF are also subjected to the personal income tax relief cap. This means all your tax reliefs to be claimed, including any relief on voluntary CPF contributions, cannot exceed the personal income tax relief cap of $80,000.

Read Also: Self-Employed Person Income Relief Scheme (SIRS) – Importance Of Filing Taxes And Having The Necessary Paperwork

#3 CPF Savings Can Be Used For Mortgage, Medical Or Other Purposes

Just like their employed peers, self-employed persons may also need to pay for their mortgage or medical insurance, as well as require funds for investments or retirement.

Having funds in CPF’s OA and SA allows self-employed persons to use it to pay for mortgage (if they are paying for their house with their CPF) or for investments. Moreover, money in our CPF accounts contribute to building a nest egg for our retirement. At 55 years old, the funds from OA and SA will then flow into the Retirement Account (RA) that is automatically set up by CPF. 

Read Also: Here’s Why You Should Top Up Your Parents’ CPF Retirement Account Instead Of Giving Parents’ Allowance

#4 CPF Monies Are Protected From Creditors

If you are self-employed as a business owner, you may be liable to liquidated damages should something unfortunate befall your business. It may be somewhat of a relief to know that CPF monies are protected from legal liabilities and cannot be withdrawn to pay for any debt that you owe. However, there is an exception for CPF monies placed in investments via CPFIS, which is part of your estate when you pass on and can be transferred to the Official Assignee to be distributed to creditors.

Even as an undischarged bankrupt, you will still be able to withdraw your CPF upon reaching 55 years old or under medical grounds – however these funds will not be protected from creditors once they are out of the CPF system. 

Read Also: Pros And Cons Of Allowing Singaporeans To Make Emergency CPF Withdrawals To Tide Through This COVID-19 Crisis

Voluntary CPF Contributions Has Its Benefits, But There Are Some Things To Take Note Of

Since Voluntary Contributions into CPF are irreversible, transferring money into it means you will have less money on hand. The only situation where you can get Voluntary Contributions refunded is if the amount exceeds the CPF Annual Limit or Basic Healthcare Sum (BHS). However, note that even if you have hit the Basic Healthcare Sum (BHS), you are still required to make mandatory MediSave contributions. 

This may pose a problem should you be faced with an urgent family matter or emergency that requires cash. Furthermore, if your business is hit with a crisis or requires more working capital, a good sum of cash may be sitting in your CPF accounts, while you have to scramble for more funds to invest into your business. 

It is advisable to set aside some liquid options as emergency funds, so that you can withdraw from quickly and without hassle. Remember that the primary purpose of CPF is for our long-term retirement needs, which is something to bear in mind when voluntarily channelling funds into your CPF.

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