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CPF LIFE Standard, Basic Or Escalating Plan? What You Need To Understand About CPF LIFE Plans Before Deciding

It’s all about your life expectancy.


This article was originally written on August 2017 and have been updated to include the CPF LIFE Escalating Plan and the Full Retirement Sum as of 2021

Most developed countries in the world have their own version of a pension scheme. This is to ensure that retirees continue to receive a basic level of income support in their old age when they are no longer working.

While some countries have welfare schemes to provide for this income, Singapore uses the CPF Lifelong Income For The Elderly (CPF LIFE). CPF LIFE is an annuity plan that provides Singapore Citizens and Permanent Residents (PRs) with a monthly payout from age 65, for as long as they live.

Payouts from CPF LIFE is based on how much individuals have in their Retirement Account (RA). The more you have in your RA, the higher you can expect your monthly payout to be.

That said, how much you receive from CPF LIFE is also based on some other factors.

To increase CPF LIFE monthly payout, CPF members can choose to defer the start of their payout. For each year that they defer after reaching 65, they can increase their monthly payout by about 7%. For example, a monthly payout of $750 to $800 at age 65 will increase to $990 to $1,070 by age 70.

The other factor that determines how much you receive each month is the CPF LIFE plan that you select. Today, there are three CPF LIFE plans that members can choose from. They are the Standard Plan, Basic Plan & Escalating Plan.

Read Also: Is The CPF LIFE Scheme Really That Bad? We Explore

What’s The Difference Between The CPF LIFE Standard Plan & Basic Plan?

A simple way of understanding the three plans is to look at how CPF illustrates the differences. The infographics below is extracted from the CPF website.

Source: CPF

The CPF LIFE Standard Plan, which is the default plan, provides a higher level of monthly payouts while leaving a lower bequest.

The CPF Life Basic Plan gives a lower monthly payout but leaves a higher bequest. Do note that the payout under the Basic Plan will get progressively lower when your combined CPF balances eventually fall below $60,000. This is because the extra interest is earned on the first $60,000 of your combined CPF balances are credited to the Retirement Account (RA) and paid as part of your monthly payouts. As balances fall due to payouts, the extra interest earned and subsequent payouts will also decline as well.

The CPF LIFE Escalating Plan provides payouts that increase by 2% each year so that CPF members can generally maintain their standard of living even as prices rise over the years. Under the Escalating Plan, a monthly payout that starts at $1,000 when a CPF member is 65 would reach approximately $1,500 by the time the person is 85.

Read Also: CPF LIFE Escalating Plan: What You Need To Understand About The Latest CPF LIFE Plan Before Opting For It

One way to choose between the three plans is to ask yourself whether you 1) prefer to have a higher monthly payout, 2) whether you prefer taking less each month, in order to leave a larger legacy for your loved ones or 3) rather accept a lower starting payout with an increment of 2% in payout each year to maintain your purchasing power in the presence of inflation.

However, this method of choosing between the three plans can be a little simplistic, at least in our opinion. We believe Singaporeans can make a more informed decision if they analyse and understand the three plans better.

The Benefit Illustration

Think of the three plans as separate annuity products that you are considering.

For the calculation below, we assume that an individual has set aside the Full Retirement Sum of $186,000 (as of 2021) in their Retirement Account at age 55, and starts their CPF LIFE withdrawal at age 65.

Source: CPF LIFE payout estimator

CPF LIFE Standard Plan

At age 55, you set aside the Full Retirement Sum of $186,000 (as of 2021) in your Retirement Account. From age 65 onwards, you will receive $1,478 to $1,635 each month. If you pass on at 75, your bequest will be $94,945 to $98,724. If you pass on at 81 or later, there will be no bequest.

Age Member Passes On

Total Monthly Payout Received Bequest Received Total Amount Received

75

$178,838 – $197,835 $92,945 – $98,724

$271,783 – $296,559

85

$356,198 – $394,035 $0

$356,198 – $394,035

95 $533,558 – $590,235 $0

$533,558 – $590,235

 

The simple logic here is that the longer you live, the more you gain financially from CPF LIFE. This makes sense since there is a commitment to pay CPF members a monthly payout as long as they live.

CPF LIFE Basic Plan

At age 55, you set aside the Full Retirement Sum of $186,000 (as of 2021) in your Retirement Account. From age 65 onwards, you will receive $1,345 to $1,491 each month. If you pass on at 75, your bequest will be $201,311 to $213,184. If you pass on at 92 or later, there will be no bequest.

Age Member Passes On

Total Monthly Payout Received Bequest Received

Total Amount Received

75

$162,745 – $180,411 $201,311 – $213,184 $364,056 – $393,595

85

$324,145 – $359,331 $95,685 – $100,815

$419,830 – $460,126

95 $484,534 – $537,282 $0

$484,534 – $537,282

 

Once again, the longer you live, the better off you will be.

If you compare strictly using the total payout amount received and do not take into consideration the time value of money (i.e. a dollar today is worth more than a dollar tomorrow), the Basic Plan provides a higher total payout as compared to the Standard Plan for someone who passes on at age 75 and 85 because of the much higher bequest received.

However, if you are fortunate to live till 95 or later, the Standard Plan becomes superior compared to the Basic Plan since you enjoy a higher payout monthly amount each month, while there is no bequest left for either CPF LIFE plans at that age.

CPF LIFE Escalating Plan

At age 55, you set aside the Full Retirement Sum of $186,000 (as of 2021) in your Retirement Account. From age 65 onwards, you will receive $1,162 to $1,297 each month. This makes the starting payout lower compared to both the Standard Plan and the Basic Plan. If you pass on at 75, your bequest will be $118,697 – $123,406. If you pass on at 82 or later, there will be no bequest.

Age Member Passes On

Total Monthly Payout Received Bequest Received Total Amount Received

75

$154,141 – $172,042 $118,697 – $123,406 $272,838 – $295,448
85 $340,656 – $380,192 $0

$340,656 – $380,192

95 $568,038 – $633,958 $0

$568,038 – $633,958

Assuming you live till age 95 and beyond, the CPF LIFE Escalating Plan gives you the highest payout because the annual 2% increment in payout becomes valuable. However, assuming an individual passes on at age 75, the total amount received is lower compared to the other two plans because while their monthly payout is still lower at that age, the bequest they receive is also not high.

Read Also: Why The New CPF Lifetime Retirement Investment Scheme Could Be A Retirement Gamechanger

Life Expectancy Matters

Given that our tables above show that individuals who live a longer life (i.e. 95 and above) should opt for the Standard plan while those who are not as confident of living till their 90s should opt for the Basic plan, the question now turns to which plan should Singaporeans choose from.

Life expectancy rate in Singapore is 82.6. However, that’s a life expectancy rate at birth, which while useful, isn’t the most accurate to be based on for our situation.

CPF members who are choosing their CPF LIFE plan will be 65 years old. At that age, the average life expectancy for adults is 20.8 years. This also means about 1 in 2 adults who reach age 65 will also reach age 85. You can check this out on the Singstat website.

Our Analysis

Since about 50% of CPF members who are 65 will reach age 85, the total amount received at age 85 becomes a key number for us to consider. If a member were to pass on at exactly age 85, he and his loved ones will receive more under the CPF Basic plan.

Here’s a look once again at the numbers based on meeting the Full Retirement Sum of $186,000 (as of 2021) at age 55.

Total Payout Received At Age 85

Standard Plan

$356,198 – $394,035

Basic Plan

$419,830 – $460,126

Escalating Plan

$340,656 – $380,192

Based on this approach of assuming a person passes on at age 85, the CPF Basic plan appears to be the superior plan as it pays out more in total.

Of course, we cannot say for certain that the CPF Basic plan is better.

As shown above in the article, if a person were to know that he will live till age 95, then the CPF Life Escalating plan or Standard plan will be better, since passing on at age 95 means having no bequest, regardless of which plan they choose from. Thus it would be better to just get as much as possible each month.

By the same token, if a person were to pass on earlier, say at age 75 or before, then the CPF LIFE Basic plan is superior.

Of course, there is no way of knowing all these things in advance.

What are your thoughts on choosing the CPF LIFE Standard Plan or the Basic plan? Join our Personal Finance Discussion SG Group to share your thoughts with us.

Read Also: BRS, FRS, ERS: Why There Are 3 CPF Retirement Sums & Why They Increase Every Year

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