We have written extensively about the merits of topping up your own CPF accounts. The high, risk-free interest given by CPF allows it to be an effective instrument to compound your interest returns over a long period of time.
Beyond mandatory CPF contributions required, CPF members are also allowed to do their own top-up to their CPF accounts using cash. Doing so increases the savings in their respective CPF accounts, and allows them to enjoy tax reliefs on their income tax.
In this article, we will explore two main ways you can top up your CPF accounts. Firstly, you can 1) make voluntary CPF MediSave top-ups. You can also 2) top up your CPF Special Account (or Retirement Account if you are 55 or above) via the Retirement Sum Topping Up Scheme.
But what are the differences between these two schemes? More importantly, what are the implications of choosing either option over the other?
Before we dwell deeper into the discussion, let’s first understand some of the restrictions and limitations of topping up your CPF accounts.
Contribution Limit: The maximum amount that you can make a voluntary contribution for each year is the difference between the CPF Annual Contribution Limit of $37,740 and the mandatory contribution that you have already made for the year.
For example, if you already made a mandatory contribution of $30,000 to your CPF account for the year, you will only be able to make an additional voluntary contribution of $7,740 to your CPF account. If you make a contribution that exceeds the Contribution Limit, then the excess amount will be refunded without interest to you.
Do note that the CPF annual Contribution Limit only applies to the voluntary contributions made for CPF MediSave top-ups and/or if you contribute to all 3 CPF accounts (Ordinary Account [OA], Special Account [SA], MediSave Account [MA]). The Retirement Sum Topping Up Scheme does not fall under this Contribution Limit (more on this later).
However, do note that with effect from 1 January 2022, voluntary contributions made for CPF MediSave top-ups will no longer be subject to the Contribution Limit. Instead, CPF members can make voluntary contributions up to the Basic Healthcare Sum ($63,000 as of 2021, $66,000 as of 2022).
Tax Relief: The tax relief that you enjoy for voluntary contribution is the lowest of the following.
– Voluntary cash contribution to your MA; or
– Annual CPF Contribution Limit of $37,700 less mandatory CPF contribution; or
– Current Basic Healthcare Sum (currently $63,000 as of 2021) less the balance in your MediSave Account before you make the voluntary cash contribution.
What this means is that if you are making a contribution to your MediSave Account directly, but you already have $60,000 in the account, then you will only be able to earn tax relief of $3,000 (the difference between $63,000 and $60,000), as opposed to the full amount contributed.
For the Retirement Sum Topping Up Scheme, we can enjoy a tax relief of up to $7,000 per annum if we top up our Special Account or Retirement Account, and an additional $7,000 a year if we top up our loved ones’ Special Account or Retirement Account.
It’s important to note that a major change will occur from 2022 onwards. Currently, MediSave top-ups and RSTU top-ups receive separate tax deductions. The limit for tax relief for RTSU is capped at $7,000 in 2021 and another $7,000 if you top up your loved ones’ SA/RA via RSTU. As explained above, the limit for tax relief for MediSave top-ups is capped by the CPF annual Contribution Limit for which you can top-up your MediSave. Do note all tax relief is subject to your personal tax relief cap of $80,000).
However, with effect from 2022, the tax relief for both MediSave and RSTU top-ups is a shared cap of $8,000, and another $8,000 tax relief for top-ups to loved ones. This tax relief cap will be combined with the tax relief for voluntary contributions to MediSave.
Voluntary Contribution For MediSave top-ups Or Retirement Sum Topping Up Scheme?
Assuming Alex, a Singaporean who is currently 35, has $7,000 which he wishes to use to top up his CPF account and to earn tax relief.
Alex has made a mandatory contribution of $30,000 for the year, which means he can still earn tax relief of up to $7,700 if he makes a voluntary contribution to his CPF. He can choose to make a contribution to all three CPF accounts (OA, SA, MA) or just his MediSave Account. For this article, we will assume he only considers a MediSave top-ups.
Alternatively, Alex can also choose to make a Retirement Sum Top-up to his own CPF Special Account and earn tax relief of up to $7,000.
Which should he/you choose? Here are some notable factors which are worth considering.
#1 MediSave Account Can Be Used For Medical Treatment & Health Insurance While Special Account Can Be Used Only For Retirement
The first thing to note is that while you are still young (i.e. below 55), your MediSave Account will be more useful.
That’s because your MediSave Account can be used to pay for the cost of hospitalisation, pregnancy-related costs as well as some of your health insurance premiums such as MediShield Life, ElderShield/CareShield Life and any private integrated shield plan which you may purchase.
In addition, you can also use your MediSave Account to pay for hospital treatments and insurance premiums of your spouse, children and parents.
In contrast, your CPF Special Account has limited usage when you are still below the age of 55. This is because it’s meant for your future retirement. The only thing which you could do right now is to invest the funds for a higher return via the CPF Investment Scheme – Special Account (CPFIS-SA).
#2 When Your MediSave Is Full, Contributions Will Spills Over To Your Special Account.
From an interest rate point of view, both the CPF Special Account and MediSave Account are comparable because they both earn you a minimum of 4.0% per annum.
However, consider what happens if your MediSave Account has reached the contribution ceiling.
Basic Healthcare Sum: Our MediSave Account cannot have an amount that is more than the Basic Healthcare Sum (BHS) – currently at $63,000 as of 2021.
If we already achieved the current BHS, any contributions made to our MediSave Account (including mandatory contribution) will automatically flow to our CPF Special Account.
This means that it will continue to earn us a minimum interest of 4.0% per annum, similar to the contribution to our MediSave Account. This makes it a lot easier for us to achieve the Full Retirement Sum (FRS) for our CPF Special Account once our MediSave Account has reached the BHS.
#3 You Can Only Make Voluntary MediSave top-ups If You Have Not Hit The CPF Annual Contribution Limit
As we grow older, it’s likely that our salary will increase thus increasing our mandatory CPF contribution. As explained in a previous article, if we were to earn a monthly salary of $6,000 along with an end-of-year 6-month bonus, our mandatory contribution will already be $37,740, which is the Annual Contribution Limit. This means we can no longer make any voluntary contribution to our MediSave Account for the year, even if we have not reached the Basic Healthcare Sum (BHS) for our Medisave Account.
On the other hand, you can still make a retirement sum top up to your CPF Special Account even if you have reached the annual contribution limit as it is a separate scheme.
However, with effect from 1 January 2022, this will no longer be true. Regardless of whether or not we have hit the annual Contribution Limit, we will be able to make MediSave top-ups to the BHS.
Why Should You Top-Up Your Special Account Over Your MediSave Account?
The Retirement Sum Topping-Up Scheme is a separate scheme from the CPF Annual Contribution Limit. This scheme is meant for CPF members to build up their retirement savings.
#4 Your Special Account Will Ultimately Be Used For CPF LIFE
The biggest reason for topping up your CPF Special Account is how the funds are meant to support you in the future.
When you top up your MediSave Account, you are basically saying that you want the funds to help you cover the healthcare expenses for you and your loved ones in the future. When you top up your Special Account instead, the funds will be used to fund your future retirement.
At age 55, funds from your CPF Special Account and Ordinary Account will be set aside in your Retirement Account. You can choose between the Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS). You also have the option of withdrawing any unused amount from your OA and your SA which has not been set aside in your Retirement Account.
#5 Besides Paying For Healthcare Related Expenses, You Have No Real Way Of Withdrawing From Your MediSave Account
Since MediSave savings are meant for your hospitalisation and medical expenses, there is no real way you can withdraw funds from your Medisave Account, unless you fall ill – which is not what you would want either.
If you have the good fortune of living till old age without needing to be hospitalised, you might find yourself with a sizeable sum of money in your MediSave Account – without being able to use it, besides paying for your own MediShield Life, ElderShield or CareShield Life premiums, and those of your loved ones.
Of course, a positive way of seeing this is to count your blessings, knowing that the only reason why you don’t need to use your MediSave savings is that you do not have hospitalisation expenses that you need to pay for.
However, you could also be forgiven for thinking that in hindsight, you should have top up your Special Account/Retirement Account instead, since that would give you more funds that you can use during your retirement.
Similar to most personal financial decisions that we make, there are usually two sides to any decision.
When it comes to topping up your MediSave Account or your Special Account, there is no right or wrong answer. Nobody, except for you, can say whether it’s better to save up for your future medical expenses or your retirement.
The best thing we can do for ourselves is to do our best to understand how the various schemes work and to make a decision based on what we are most comfortable with.
This article was originally written on 10 June 2019 and has been updated with the latest information.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.