One popular CPF strategy for those who are just about to turn 55 is the CPF Shielding Hack. Using this hack, pre-retirees can earn more interest returns, while retaining greater flexibility in using their CPF balances in their older years.
In recent years, many more people have warmed to the idea that CPF enables us to grow our retirement nest egg with a relatively attracting floor interest rate of 4.0% p.a., while safeguarding our principle from volatility in the financial markets. As the interet rate environment has hiked, interest rates paid by our CPF Special Account has also increased to 4.04% p.a. Beyond this, we also enjoy an annual tax relief of up to $16,000 when making top-ups to our and our loved ones’ CPF accounts.
As a result, 308,000 people made CPF top-ups to their Special Account and Retirement Account, amounting to more than $4.6 billion in 2022.
What Is The CPF Shielding Hack?
When we turn 55, a new Retirement Account (RA) is created for us. Up to our Full Retirement Sum will be transferred from our Special Account and Ordinary Account into this Retirement Account. For example, the Full Retirement Sum (FRS) in 2024 is $205,800.
The first pool of monies that will be transferred into our Retirement Account will come from our Special Account. This is because the balances in our Special Account have always been set aside for our retirement purposes. If we are unable to hit the FRS with just our Special Account funds, then our Ordinary Account balances will flow in to plug the gap.
We can use the CPF Shielding Hack to “shield” our Special Account balances, and even Orindary Account balances, from being transferred into our Retirement Account. In the first step, we can use the Special Account Shielding Hack to “shield” our Special Account balances. If we wish, we can even utilise the Ordinary Account Shielding Hack to further “shield” our Ordinary Account balances.
The Special Account Shielding Hack
The problem some people have with the way our Retirement Account is funded up to the FRS is that our Special Account balances, which earn 4.0% per annum, flow into it first. Meanwhile, our Ordinary Account (OA) balances, earning a lower 2.5% per annum, is only transferred in if we have a shortfall thereafter. Due to this, some people may prefer our OA funds to flow into our Retirement Account first. As this is not an option, the only way to achieve this is to use the Special Account CPF shielding hack just before we turn 55 – which will automatically mean our Ordinary Account balances is used to fund our Retirement Account. This way, we optimise the amount of interest we earn on our combined CPF balances.
Unfortunately, this hack has been conjured up because we do not have an option to transfer our Ordinary Account balances to our Special Account after the age of 55 – we can only do this before we turn 55, and up to the Full Retirement Sum (FRS). This is the primary reason why the Special Account CPF Shielding hack exists.
To shield our Special Account balances, we typically have to correctly time an investment into a low-cost and liquid fund offered on the CPF Investment Scheme (CPFIS) before we turn 55. We’re only trying to shield the amount, and not trying to actually earn more than the prevaling interest rate (currently 4.04% p.a.) on our Special Account funds. This will effectively “shield” our Special Account balances, requiring our Ordinary Account balances to flow into our Retirement Account (RA) to hit the Full Retirement Sum on our 55th birthday. After we turn 55, we are going to divest the entire amount invested and see it flow back into our Special Account – and continue to earn the interest rate paid on Special Account balances (again, this is currently 4.04% p.a.).
One other thing to remember is that we can only invest anything beyond the first $40,000 in our Special Account – which means at least $40,000 of our Special Account balances will be transferred into our Retirement Account.
The Ordinary Account Shielding Hack
If we choose, we can also shield our Ordinary Account balances.
This way, we get to keep our Ordinary Account balances outside of the CPF LIFE scheme. We retain greater flexibility with our Ordinary Account balances, being able to pay for a property purchase or to invest. Or, simply to keep under our own names rather than see it eventually pour into the CPF LIFE scheme.
In addition, we also get to make additional top-ups to our Retirement Account to earn yearly tax relief doing so. This is something else we can take into account as we no longer gain tax benefits for top-ups made to our Retirement Account beyond the FRS – even though we can top-up our RA to the Enhanced Retirement Sum (ERS).
To shield our Ordinary Account balances, we also have to correctly time an investment into a low-cost and liquid fund offered on the CPF Investment Scheme (CPFIS) before we turn 55. Unlike our Special Account, we can only invest anything above the first $20,000 of our Ordinary Account balances.
If we employ both the Special Account and Ordinary Account shielding hacks just before we turn 55, a total of $60,000 ($40,000 from our Special Account and $20,000 from our Ordinary Account) will still be transferred into our Retirement Account.
Stop Ordinary Account Balances From Going Into Retirement Account
If we still have a home loan to service, we may need to start paying for it in cash if our entire Ordinary Account is transferred into our Retirement Account. This is especially important if we are not working after 55. Even if we are working, only 12% of our salary flows into our Ordinary Account at age 55, compared to 15% before we turn 55, and up to 23% for those below 35. Similarly, if we intend to make use of our Ordinary Account balances to buy a home, we lose this flexibility after the funds a poured into our RA.
This is not a shielding hack. We can simply apply directly to CPF to stop our Ordinary Account balances from being transferred into our Retirement Account if we still need it to service a home loan. We just need to log in to the CPF website to apply to reserve our Ordinary Account balances before our 55th birthday.
Shielding Hack To Keep More Than $20,000 In Ordinary Account When Purchasing A Home AND Using HDB Home Loan
If we take an HDB housing loan, we have to use our entire CPF Ordinary Account balances, except up to $20,000, to pay for the home. This is despite the fact that we are allowed to take up to 80% home loan. If we want to keep more than $20,000 in our Ordinary Account, we can employ another CPF Shielding Hack. We need to invest the amount of Ordinary Account balances we intend to keep in our OA prior to paying for our home. Again, we need to time the investment neatly, so it flows out of our OA before we need to pay for our home and flows back in after we have paid for our home.
Doing this, we get to maximise the concessionary HDB Housing Loan we are entitled to – borrowing up to 80% of our home price. Moreover, we also get to build up a bigger Ordinary Account balance that can be used as an emergency fund to continue paying for our monthly mortgage should we leave the workforce by choice or because of poor health.
If we do not have a big amount of CPF savings, we could also earn more in interest returns than what we pay on the HDB Housing Loan. Right now, the interest rate on the HDB Housing Loan is still 2.6% – or 0.1% higher than the Ordinary Account interest rate. If we have less than a combined $60,000 in our CPF accounts, we can earn an additional 1% on our CPF balances. If we are over 55, we can also earn an extra additional 1% on the first $30,000 on our CPF balances. This combination allows us to potentially earn up to 4.5% on our Ordinary Account balances, while paying only 2.6% in the HDB Housing Loan. We can also simply invest our OA balances in government securities, such as the T-bills to earn a higher interest rate (e.g. the latest T-bills interest rate is 3.75% p.a.).
Does It Make Sense To Do The CPF Special Account Shielding Hack?
Since the Special Account and Retirement Account pay the same base interest rate, but the Ordinary Account pays less, it can make sense to see our Ordinary Account balances get transferred into our Retirement Account instead.
Due to this reason, this hack makes most sense only if we have a large Ordinary Account balance we rather see flow into the Retirement Account compared to our Special Account balances. In addition, we must also like the CPF scheme such that we want to keep our excess funds in it rather than being able to withdraw anything above the FRS in cash.
For example, anyone turning 55 in 2024 has to set aside the Full Retirement Sum $205,800. If the person has $200,000 in their Ordinary Account and $100,000 in their Special Account, by employing the Special Account shielding hack, he or she allows their Ordinary Account balances to fund the entire Full Retirement Sum (FRS), apart from the first $40,000 that will come from their Special Account. This way, they would have $34,200 remaining in their Ordinary Account and $60,000 in their Special Account, and $205,800 in their Retirement Account.
Without the Special Account shielding hack, they would have $94,200 in their Ordinary Account, $0 in their Special Account, and $205,800 in their Retirement Account. This earns much lower interest returns compared to using the Special Account shielding hack. Nevertheless, in both situations, the individual can withdraw $94,200, because they have met the FRS of $205,800 at 55.
In the example, if the individual does not use the Special Account Shielding Hack, the entire $94,200 withdrawal will come from your OA balances. If they do use the Special Account Shielding Hack, then the $94,200 will come from a combination of $34,200 from their OA balances and $60,000 from their SA balances.
Another solution we can consider is to transfer our Ordinary Account balances (up to the Full Retirement Sum) to our Special Account before we turn 55. Doing so may even lead to a more optimal Special Account Shielding Hack, enabling us to keep more in our Special Account.
Does It Make Sense To Do Ordinary Account Shielding Hack?
If we want to shield our Ordinary Account, we first have to already be willing to do the Special Account shielding hack. By employing both shielding hacks, we will still see a minimum of $60,000 flow into our Retirement Account – $40,000 from our Special Account and $20,000 from our Ordinary Account as we cannot invest these minimum amounts.
Unlike shielding our Special Account balances, by shielding our Ordinary Account balances, we are earning lower interest returns compared to the Retirement Account. This means we must prefer the flexibility of using our Ordinary Account or dislike being on the CPF LIFE scheme. Nevertheless, in the current elevated interest rate environment, we can also choose to invest a portion of our OA savings into very investment instruments such as the Government T-bills to earn close to 4.0% interest p.a.
Since we do not meet the Full Retirement Sum (or Basic Retirement Sum with property pledge), we cannot withdraw our excess CPF monies even if we technically have more than the $192,000 across our Retirement Account, Special Account and Ordinary Account.
In terms of flexibility, we are able to use our Ordinary Account balances to purchase a property, pay for mortgage loans, and if we want to invest to potentially earn a higher return.
Timing Is Important When Doing CPF Shielding Hack
If we are trying to shield our CPF Special Account or Ordinary Account, timing is going to be crucial. We need to invest these funds right before we turn 55, and we should try to time it such as it is divested right after we turn 55, and see it flow back into our CPF accounts.
This is because we will not be earning much interest for the duration that our money is outside the CPF system. It can be a very substantial amount that we lose out if we don’t time it properly. It can also be a very costly mistake if we invest in the wrong investment – it needs to be very safe, very liquid and have very low costs involved. Fortunately, the elevated interest rate environment allows us to invest in very safe instruments, such as the Government T-bills – where we do not lose out much in terms of interest returns and incur a negligible costs to invest.
If we try to do this a few days before we turn 55, we may also end up being too late and see our CPF Special Account, or Ordinary Account, balances not invested in time.
This article was originally published on 7 December 2020 and has been updated.
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