Whenever we write about CPF LIFE, one comment invariably comes up: wouldn’t it be better if we could leave our Retirement Account (RA) balances in our RA, to continue earning a good interest return on our funds?
Interestingly, this was how our retirement drawdown scheme used to work in the past under the Retirement Sum Scheme (RSS), before CPF LIFE was implemented to strengthen our financial security in retirement. Inevitably, there will be pros and cons to the new system.
The most obvious differences between the old and new scheme is 1) the way we receive our payouts; 2) the interest on our balances; and 3) our ability to receive lifelong payouts. You can read more about the similarities and difference between the schemes in this article.
For those who wish they were able to continue enjoying certain benefits of the old RSS, the CPF LIFE Basic Plan could be what you are actually looking for, as opposed to the CPF LIFE Standard Plan or CPF LIFE Escalating Plan.
What Is The CPF LIFE Basic Plan?
At 65, you will be able to choose the CPF LIFE plan you wish to be on. If you choose to go with the CPF LIFE Basic Plan, 10% to 20% of your RA balances will be deducted as your CPF LIFE annuity premium, while the remaining 80% to 90% will continue to remain in your RA.
The CPF LIFE Basic Plan is typically referred to as “more for your loved ones”, as it provides a lower monthly CPF LIFE payout, retaining majority of your funds in your RA, to leave more behind for your loved ones when you pass on.
How Will You Receive Your CPF LIFE Payouts?
When you choose to start receiving your CPF LIFE payouts, you will start drawing down from your remaining 80% to 90% balances in your RA.
At the same time, as this 80% to 90% of funds remain in your RA, you will continue to earn an interest return of 4.0% per annum, as well as attract extra interest on the first $60,000 of your combined CPF balances.
This means once your combined CPF balances dips under $60,000, you will experience a gradual decrease in your CPF LIFE monthly payouts, due to the reduction in extra interest paid to your RA.
What Happens To Your CPF LIFE Premiums?
The 10% to 20% premium range you end up paying depends on your gender and the age you wish to start your CPF LIFE payouts, which can be from your Payout Eligibility Age (PEA) of 65 to a maximum of 70 years old.
This premium is paid into the Lifelong Income Fund, which provides you with financial security in the event you live beyond what your RA savings can pay you. Your premium also earns an interest return, which is paid to the Lifelong Income Fund, rather than into your RA account.
On the CPF LIFE Basic Plan, from the time you start receiving your monthly payouts until one month before you turn 90 years old, you will be withdrawing your monthly payouts from your RA.
When you turn 90, your RA will be fully used up, but you will continue to receive your monthly payouts for as long as you live. This is what your 10% to 20% premium was used to purchase when you initially joined CPF LIFE – protection against the risk of outliving your retirement funds.
Should Everyone Choose The CPF LIFE Basic Plan?
Before thinking you should go with the CPF LIFE Basic Plan, you need to consider what you want in your retirement.
While payouts for the Standard Plan and Basic Plan may look quite similar, they are close to 10% apart. Also, even though you may be receiving a higher monthly payout on the Basic Plan than the Escalating Plan, the Escalating Plan may start out lower but increases around 2% per year.
Source: CPF LIFE Estimator
If you want to live a higher standard of life in your retirement years, the Basic Plan may not be the most suitable plan. This is because the Standard Plan and the Escalating Plan (from around the time we turn 73) will both provide you a higher monthly payout in your retirement years.
This enables you to enjoy the fruits of your labour during your golden years.
You also need to consider the possibility that healthier lifestyle choices and medical science may enable Singaporeans, and people in general, to live even longer than previous generations. This makes the Standard Plan and the Escalating Plan even more attractive.
Source: CPF LIFE Estimator
No one knows when we are going to pass on either. While the Basic Plan may provide the best payoff (in terms of amount we receive in monthly payouts + eventual bequest to our loved ones) the younger we pass on, the Standard Plan and the Escalating Plan may become better plans if we live longer.
Today, Singaporeans already have one of the longest life expectancies, and medical science could continue to boost this. This may make the Basic Plan less attractive.
In the chart below, it shows that the Basic Plan will provide our beneficiaries with a bequest even if we pass on above the age of 90. This is mainly from our 10% to 20% initial premium payment into the Lifelong Income Fund.
However, we need to consider the fact that we would have taken more out of the system during our living years on the Standard Plan and Escalating Plan, than just worrying about leaving our beneficiaries a bequest.
Source: CPF LIFE Estimator
CPF LIFE Basic Plan – Best Of Both Worlds?
On the CPF LIFE Basic Plan, we get to retain 80% to 90% of our funds in our RA – which was what the RSS allowed us to do. This way, we get to earn good interest returns that flow into our RA, rather than into the Lifelong Income Fund.
Of course, we miss out the interest returns our 10% to 20% premiums would have paid us. However, we need to consider the benefits of being stress-free, knowing that we will continue to enjoy our lifelong payouts even if we outlive our RA balances.
If we pass on before our RA is depleted, our beneficiaries will receive our RA balances, as well as the 10 to 20% premium we initially paid into the Lifelong Income Fund. We only lose out the interest return on the 10% to 20% initial premium, which could be a small price to pay for being stress-free in our retirement.
Finally, as mentioned in the points above, we also need to consider the lifestyle we wish to lead in our retirement years – one that allows us to spend our hard-earned money rather than leaving more behind for our beneficiaries – as well as how our longevity may change the way we look at the suitability of the plans.
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