This article was contributed to us by Sheng Shi Chiam, CFA, Personal Finance Lead at Endowus.
Getting your first paycheck and being able to do more with the money you earn can be both exhilarating and intimidating. A part of your total monthly wages will go into your CPF accounts, and it is important for you to understand how CPF works so that you can start your #adulting journey on the right foot.
Here are 3 things that you should know about CPF.
#1 How Are Your CPF Contributions Allocated Into The Different CPF Accounts?
At the start of your career, 20% of your total monthly wages (employee’s share of contribution) goes into your CPF account and your employer contributes an additional 17%. This 17% is not a part of your total monthly wages (yay!) and it is not subject to income tax either.
If you are a Singapore citizen aged 35 and below, 37% of your total monthly wages (i.e. total CPF contribution) will be allocated to your CPF Ordinary Account (23%), CPF Special Account (6%) and MediSave Account (8%). The distribution will change as you get older.
#2 What Can The Different CPF Accounts Be Used For?
As CPF is meant to help Singaporeans to save for key financial decisions, it is structured so that any contributions can be split into different accounts with varying functions. This ensures that we stay disciplined in our financial decisions to benefit our future selves.
The CPF Ordinary Account (CPF OA), which is where the bulk of your CPF contribution goes to at a younger age, can be used for housing, insurance (such as the Dependant Protection Scheme), investment and education. This account is especially important for young couples looking to buy a new home.
The investment options for your CPF OA are limited to ensure that Singaporeans do not engage in higher risk investments that may not adequately compensate them for the risk they are taking.
The CPF MediSave Account (CPF MA), which can be used for hospitalisation expenses and approved medical insurance, such as the insurance premiums for the government-mandated Medishield Life. You can pay for the mandatory basic MediShield Life premiums fully using MediSave, whose coverage:
- Is sufficient for large hospitalisation bills in Class B2 or C wards in public hospitals, even though you still have to pay for a portion of the bills, and
- Allows you up to $100,000 worth of claims benefits per year.
To get additional coverage for higher class wards (Class B1 and above) or to stay in private hospitals, you can apply for an Integrated Shield Plan (IPs). The additional benefits come at an additional insurance premium ($300 if you are below 40 years old), which you can pay using your MediSave.
Read more: 9 ways to tap on your MediSave (CPF)
The CPF Special Account (CPF SA) is meant for retirement savings and investments and hence its usage is limited. You get a higher interest rate in your SA account, and in order to keep your retirement monies safe, only safer investments are allowed to be invested using CPF SA funds.
#3 What Are The CPF Interest Rates And The Additional Interest Rates That You Can Earn?
CPF interest rates are attractive relative to bank interest rates, starting from 2.5% all the way to 5% for young adults.
Your CPF Ordinary Account gives you 2.5% interest per annum, while your CPF MediSave and Special Account give you 4% interest per annum. Do note that the interest is credited into your CPF account at the end of the year.
Also, you will get an additional 1% interest per annum for the first $60,000 of your combined CPF balance, with up to $20,000 coming from your CPF Ordinary Account. The additional interest allows you to grow your CPF money even more quickly.
What To Do With Your CPF As A Fresh Graduate
#1 Consider Paying Off Your CPF Education Loan
Your parents or siblings might have taken up an education loan through the CPF Education Scheme. You will have to start repaying the loan one year after graduation, and this repayment has to be made in cash.
You can choose to pay a lump sum or monthly instalments up to over 12 years. Your family may be better off if you pay off the loan as early as possible to save on interest.
#2 Pay For Your Medical Insurance Using MediSave
Getting medical insurance helps to alleviate financial distress when unexpected health problems surface (touch wood!). Given that healthcare costs in Singapore have been rising by 9 to 10% over the past 2 years, it is important to get adequate medical insurance to cover potential high healthcare costs.
You are automatically enrolled in the Medishield Life program, and any insurance premiums will be deducted from your MediSave account for you. To get additional coverage, you can get an Integrated Shield Plan with a private insurer. Understand how different insurance plans vary here.
#3 Think About Paying For Your Future Home Using CPF
With 3-room non-mature HDB BTO starting at $170,000 (excluding grants), and minimum down payments at 10% (HDB loan) or 25% (bank mortgages), getting a home for fresh graduates appears to be impossible.
Thankfully, you can finance all of your HDB loan down payment, and pay most of your bank mortgage down payment using CPF. Do note that a downpayment of 25% for the purchase value has to be made, of which up to 20% may be paid with CPF OA savings, and the remaining 5% in cash. Also, the amount of CPF you can use depends on whether the lease can cover you for 95 years.
#4 CPF Nomination
The monies in our CPF accounts are not considered part of our estate and hence are not covered by a will. The money will be kept safe by the Public Trustee’s Office before it is distributed based on intestacy laws, but there is a fee payable for it.
CPF is there for us to and through the key financial milestones in our life, be it paying for our first home, education or medical insurance and expenses. Understanding how it can complement our financial plans is an important first step for new entrants to the job markets as they start to take more financial responsibility.
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