Filial piety is one of the Asian values that have been inculcated in most Singaporeans from young. One of the unstated but silently expected things we have to do as adult children is to give our parents allowance.
To sidestep the potential landmine of whether you should or should not give an allowance to your parents (which will depend on the relationship you have with your parents and many other factors), this article assumes that you are intending to give your parents an allowance and are looking for the best way to do so.
One rationale for giving parents allowance is to provide from them in their older years: a form of retirement planning. Yet, is giving your parents an allowance directly the best way to provide for them as they age? If your parents are like mine and not reliant on your support, the allowance you are giving them is most likely just sitting in a bank account collecting dust (and minimal interest).
Here are the reasons why you should top-up your parents’ CPF Retirement Account instead of giving them allowance directly
#1 Topping Up Your Parents’ CPF Retirement Account (RA) Will Increase Their CPF LIFE Payouts And Actually Give Them More
Instead of letting the money you give to your parents sit idle in a bank account, using the same amount to top-up your parents’ CPF RA will give you a better return on capital. Not only is CPF Life monies guaranteed by the government, but it also provides high, risk-free returns of up to 6% p.a.
For example, you plan to give your parents a monthly allowance of $500 or a total of $6000 a year. Assuming that your mother is 65 years old this year and has a CPF RA balance of $100,000, topping up $6000 to her CPF RA will increase her CPF LIFE payouts from an estimated $545 to $576 to an estimated $574 to $607. This is an increase of about $30 a month, or $360 a year; a return of 6% per annum while retaining the capital of $6000 in CPF.
If your parent is not yet 65, the top-ups will compound and give a higher return. For example, if you top up the same $6000 when your mother is 55 years old, the top-up will increase her CPF LIFE payouts from an estimated $641 to $689 to an estimated $674 to $725. This will be an increase of about $35 a month or $420 a year; a return of 7% per annum.
Note: the examples are calculated using CPF LIFE Estimator and are based on CPF LIFE standard plan and topping up your mother’s account. As females receive a lower CPF Life payout than males, the numbers may be higher for topping up your father’s account.
#2 Topping Up Your Parents’ CPF Retirement Account (RA) Will Provide For Them For Life
While we presume that we can provide for our parents (and dependents) for life, one thing we rarely think about is our own mortality.
CPF LIFE payouts are guaranteed for life. By topping your parents’ CPF RA, the payouts will continue for as long as your parents are alive, even in the unfortunate event where you are no longer able to continue giving an allowance.
Additionally, you can be assured that the money is going to your parents and no one else. It is harder to scam someone of the entirety of their CPF RA than the cash in the bank.
#3 You Will Enjoy Tax Deductions For Topping Up Your Parents’ CPF Retirement Account (RA)
One major benefit of topping your parents’ CPF RA is the tax benefits. Under the Retirement Sum Topping Up Scheme (RSTU), you can top up your parents’ CPF RA and receive tax relief of up to $7,000 per calendar year.
However, this tax relief is not per parent but for all top-ups made to your loved ones, including parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings.
This also means that to optimise the tax benefits, you can only top up your parents’ CPF RA to $7000 or $3500 per parent a year or $583.33 a month or $291.66 per parent a month. If you intend to give more than this amount as an allowance to your parents, topping up more would not reap you additional tax relief, though your parents would still benefit from the higher returns from the CPF LIFE payouts.
Additionally, if your parents meet the requirements for Matched Retirement Savings Scheme, they will receive an additional top-up from the government, of up to $600, to match the amount you put into through RSTU.
Giving Your Parents An Allowance Is A Form Of Immediate Support While Topping Up Their CPF RA Is A Form Of Long-Term Support
While there are many benefits to topping up your parent’s CPF RA, it may not be applicable for everyone. For parents who require immediate monetary support, giving an allowance is the most direct method. Likewise, for parents who have little to no CPF savings in their RA, topping their RA may not make sense as the payout increase is very little and spread throughout their lifetime. In these cases, giving your parents the monthly allowance would ease their immediate financial needs and concerns.
If your parents are much younger than 65 years old, while the eventual CPF LIFE payout may be much higher, they would not see nor receive the monies until much later in life. Depending on how “CPF literate” they are, it may not be easy to convince them of the benefits of topping up their CPF RA instead of just giving them an allowance.
While topping up your parents’ CPF RA may be beneficial in the long run, it does take a long time to collect its full benefits. A top-up of $6000 will take 16 years to pay out via CPF LIFE, even if it yields 6% to 7%. Topping up only works if your parents have no immediate need of the monies and are willing and able to see the long-term benefits: higher risk-free returns on guaranteed capital.
Finally, there is a limit to how much you can top up your parents’ CPF RA. Assuming that your parents are above 55 years old, the maximum top-up to their RA is up to the maximum of the Enhanced Retirement Sum which is currently $271,500.