Apart from mandatory contributions from our salary each month, we can also increase our MediSave Account (MA) balances by making top-ups.
From 2022, we can top up our MediSave Account (MA) to the Basic Healthcare Sum (BHS) at one shot. This is a major change to the way we can currently top-up our MA. Right now, our maximum top-up amount each year is the difference between the CPF Annual Limit of $37,740 and our mandatory CPF contributions.
For example, if we are below 55 and earn the median salary of $4,000, we would be contributing 37% to our CPF accounts from our monthly salary. This would be $1,480 each month, and $17,760 each year. Currently, we can only top-up the difference between the CPF Annual Limit of $37,740 and our mandatory CPF contributions of $17,760, which is $19,980. From 2022, we can top-up the entire difference between our existing MediSave Account balances and the prevailing BHS.
This change was part of the CPF (Amendment) Bill 2021, announced by the Ministry of Manpower (MOM) on 1 November 2021.
What Is The Basic Healthcare Sum (BHS)?
The Basic Healthcare Sum (BHS) sets the maximum limit of MediSave Account balances we can have. According to CPF, this is the estimated amount of savings we will need for our basic subsidised medical needs in our old age.
In 2021, the BHS is $63,000. We don’t know what the BHS for 2022 will be yet.
|Age in 2021||Year when cohort turned 65||BHS (fixed for life)|
|70 and above||2016 or earlier||$49,800|
As we can see, the Basic Healthcare Sum (BHS) increases every year. However, once we turn 65, our BHS is fixed for life at the prevailing rate. This means that anyone who turned 65 in 2020 will have their BHS fixed at $60,000 even though the BHS has increased to $63,000 in 2021, and will continue to increase in subsequent years.
Here are some things we should consider when deciding to max out our MediSave Account balances up to the BHS.
#1 You Only Get A Tax Deduction Of Up To $8,000 Each Year
One of the main reasons many individuals top-up our CPF accounts – either via the RSTU or our MediSave Account – is because we get a generous dollar-for-dollar tax relief on our top-up monies. In the example above, we would get a tax relief on the full $19,980 if we made a top-up to our MediSave Account. This is subject to a personal income tax relief cap of $80,000.
From 2022, the cap on the tax relief we can get each year for making top-ups to our own MediSave Account is $8,000.
So, while we can make top-ups to our MediSave Account of up to the BHS amount in 2022, it might make more sense to spread out our top-ups rather than to do it in one shot. This way, we can maximise tax savings.
#2 Your MediSave Account Balances Earn A Minimum Of 4.0% Interest Each Year
Our MediSave Account (MA) pays a minimum interest of 4.0% per annum. This is a relatively good return.
The latest CPF changes remove the limitation of only being able to make MA top-ups of the difference in our CPF Annual Limit and our mandatory CPF contributions. Now, we can earn the 4.0% per annum interest on a larger pot of money if we wish to top-up to the BHS. In one shot.
One extreme example is that we can top-up our child’s MediSave Account (MA) up to the BHS as soon as they are born. They will then be able to enjoy this rate of return. They will also see their other CPF accounts grow faster, which we will discuss in a later point.
Without taking on any investment risk or having any financial knowledge, we can compound our MediSave Account balances at a relatively good interest rate. However, if we are confident, we may be able to beat this 4.0% interest return by investing our funds over the long-term.
#3 Your Interest Returns Can Be Used For “Free” Insurance Coverage
One way of thinking about our 4.0% per annum interest returns is that we can receive “free” insurance coverage.
We can currently pay for several insurance policies with our MediSave Account balances:
- MediShield Life
- Portion of Private Integrated Shield plans
- CareShield Life (or ElderShield)
Let’s take the example of a 41-year-old male Singaporean. Their MediShield Life premium will be $525. Their maximum Additional Withdrawal Limit (AWL) for private insurance component is $600. And their CareShield Life premium is about $257. Their total insurance coverage that can be paid via MediSave is $1,382
A 4% yield of $63,000 is $2,520 each year. This means we can pay for our own medical insurance and still have left over interest monies. Alternatively, we can use the additional interest to pay for our children’s insurance policies, as their CPF balances will earn an additional 1.0% return compared to our own.
#4 This Is A One-Way Top-Up
Like all CPF contributions, topping-up our MediSave Account is a one-way transaction. If we run into financial difficulties or realise we can make better use of our top-up monies, there is no way to reverse this decision.
Hence, we should be very careful when deciding to make any top-ups into our CPF accounts.
#5 You Retain Greater Flexibility To Use Your MediSave Funds, Compared To Special Account Funds (Via RSTU)
While top-ups are not reversible, our MediSave Account arguably offers the greatest flexibility in terms of being able to use our funds.
We can use our MA balances to pay for essential insurance coverage for ourselves and our loved ones. We can also make use of our MA balances to pay for large medical expenses for ourselves and our loved ones. We can also make use of our MediSave Account balances to pay for the birth of our children via the MediSave Maternity Package.
We typically cannot use top-ups to our Special Account or Retirement Account until we turn 65 – and withdraw it via CPF LIFE.
#6 Excess Contributions From Your Salary Spill Over Into Your Special Account (Or Even Ordinary Account)
By topping up our MediSave Account (MA) to the BHS, subsequent mandatory contributions from our salary and any interest returns will flow into our Special Account or Retirement Account if we are 55 and above. This will help us to also reach our Full Retirement Sum (FRS) much faster.
If we have also hit the Full Retirement Sum (FRS) already, our MediSave contributions will then flow into our Ordinary Account balances. This will allow us to use it for a wider range of purposes, including for housing down payment or monthly mortgage.
Maxing Out Your MediSave Account – We Need To Make Our Own Decision About Whether It Makes Financial Sense
Since we now have the ability to top-up our MediSave Account up to the BHS, we should ask ourselves if doing it will make financial sense. Each of us will have to come to that conclusion on our own – deciding based on our own personal financial situation.