What has changed to our CPF scheme?

We explains the key changes that you need to know about

On 17 August 2014, PM Lee Hsien Loong dedicated 27.75mins of the National Day Rally 2014 towards explaining the CPF scheme and the changes that will take place in the near future.

So does these changes seem to be incorrigible, or does it actually does solve some of our woes? Let us look into each question and analyze the situation.

 Changes:

• Minimum Sum (MS) will be increased to S$161,000 in 2015
• There will be no major increments to the MS after 2015
• MS increments will happen more gradually
• CPF will allow withdrawal a lump-sum amount from their MS
• More flexibility in the usage of the CPF to better fit each individual

 Questions:

1. Should we be surprised that the MS has increased?
2. No major increments after 2015, you must be kidding me?
3. Is this increment excessive?
4. What sort of increment of the MS should we be expecting in the future?
5. What is the amount of lump-sum withdrawal we can make?
6. What types of flexibility in the usage of CPF can Singaporeans expect to better fit each individual?

Q1: Should we be surprised that the MS has increased?

No. The government and the CPF board has been advocating that the previous MS of S$155,000 will not be sufficient due to the rate of inflation in Singapore. Hence, most or all Singaporeans should have been expecting it to increase.

Q2: No major increments after 2015, you must be kidding me?

We should be surprised if the government intends to continue major increments of the MS.

In 1987, the government recognized that most Singaporeans did not have adequate knowledge for retirement planning. Thus, the MS was introduced. It was to provide Singaporeans for retirement and ensure stability for the elderly in their older age.

The MS became more relevant in recent years when people became more financially savvy and began to understand that the threat of inflation will erode assets and wealth of Singaporeans. Furthermore, the trend of increasing life expectancy will create a huge burden for older Singaporeans as well as their immediate families. If this problem is not resolved, it will became the government’s problem and by default, the taxpayers’ problem.

It took the government and the CPF board 28 years, including 2015, to reach and attain the consensus of an optimized amount of S$161,000 as the MS. Hence, we should not be expecting the government and the CPF board to be increasing the MS sharply like how they did the past 11 years, from next year onwards.

Q3: Is the increment excessive?

The increment for 2015 is NOT excessive. Taking into account the last 10 years, the MS of S$90,000 in 2005 and the MS of S$161,000 in 2015. The average increment is S$7,100/year. Do note that the increment provides for both inflation and also to account for the fact that the original sum was deemed insufficient to begin with.

Q4: What sort of increment to the MS should we be expecting in the future?

During the National Day Rally, PM Lee suggested that there will be no major increments, going forward, in the MS as the government and CPF board has deemed the optimized value to be S$161,000. Therefore, a good guesstimate would be an annual increment within a band of S$ 1,100 to S$ 3,000, to account for inflation. A minimum sum that does not account for inflation will not stay relevant for long.

Q5: What is the lump-sum withdrawal amount we can make?

As of the National Day Rally, PM Lee did not divulged any methodology on how the lump sum withdrawal should be calculated. Therefore, we would suggest Singaporeans to not put too much thought (or hope) into it until more information is released to prevent over-expectation.

Q6: What types of flexibility in the usage of CPF can Singaporeans expect to better fit each individual?

We would be expecting the government and the CPF board to differentiate each CPF holder according to their education, job experience and wealth. Only those who are versed in the “Risk and Return” theory would be allowed to use their CPF monies extensively for prudential investments by themselves.

Education: Those who are equipped with certified finance qualifications, such as a finance degree, CFA or CPA, will have greater flexibility in the quantum usable for investments as well being able to use more financial products other than CPFIS-OA approved instruments.

Job experience: Those who are working with skills applicable to investments will be able to gain more flexibility due to their applied knowledge while working.

Wealth: Those who are wealthier and have provision for a lot more for retirement needs would be able to use more of the CPF monies for better asset allocation and to satisfy higher risk appetite.

This is very subjective but we would expect the 3 base criteria to be part of it.

Conclusion

Has this year’s 27.75mins presentation of the CPF solved most queries or satisfied your expectations of the CPF?

One topic worthy of discussion will be on the Lease Buyback Scheme (LBS). This topic will be analyzed with a model, to see its robustness and how it will help Singaporeans attain better retirement, in the next few articles.

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