CPF is undergoing major renovation. Many clients asked me about it and I also noticed a surge in google searches. I wrote a very long commentary on Analysis of CPF Changes 2015 & my very long commentary but apparently I have to write some more!
For those who wants to know when the changes are going to be effect, the bad news is that the changes are not going to happen at the same time immediately. So this article is written for those who wants to know the timetable of the changes.
The CPF Member is allowed to have a higher Retirement Account to $241,500.
This is for those who are turning 55 in 2016.
Hence, those who are 55 this year missed the boat. This may not be a big deal for many since majority cannot meet their Minimum Sum of $161,000 or now renamed to Full Retirement Sum.
Under current rule, CPF Member who met the $161,000 can withdraw the excess (subject to meeting Medisave Minimum Sum). Some of my clients use it as a piggy bank in which they would not withdraw all the excess but they would do so as once a year. In the meantime, they allow their excess money in CPF to earn a higher interest.
Since that the rule has changed allowing one to increase the RA to $241,500 (Enhanced Retirement Sum) limit, does it mean that the flexibility to withdraw the money from $161,000 to $241,500 is no longer there once they transfer their money to RA? In fact, under the previous system, a CPF Member is already allowed to have more than the Minimum Sum (but only the amount of Minimum Sum can be used to buy CPF Life and there lies the confusion that the Minimum Sum is actually the Maximum Sum).
I would suggest people to be careful when they opt for Enhanced Retirement Sum and study the liquidity implication carefully.
Ability to withdraw 20% of Retirement Account at Payout Eligibility Age
This is effective for those turning 55 from 2013. Since the Payout Eligibility Age is 65 for those turned 55 in 2013, it implies that the earliest 20% can be withdrawn is (65 -55) + 2013 = 2023.
Ability to postpone the payout start age so as to enjoy a higher monthly CPF Life payout projected to be about 6-7% more.
There is no timeline on when will this be effective.
One-on-one retirement planning service
This will be for those turning 55 in 2015 and will be available in the second half of this year. I think CPF can consider recruiting insurance agents because there will be massive number of agents who are going to lose their jobs because of the Balance Score Card and the Web Aggregator.
Ability to choose CPF Life plan at the payout age instead of 55
This is effective from January 2016. This means those turning 55 this year has to choose their CPF Life plans.
My current my recommendation is to select CPF Life Basic plan since the returns are higher than CPF Life Standard. However, the CPF Life plans will have to change to take into account that the deferred period is effectively reduced to zero.
Extra 1% interest of CPF for those 55 and above for the first $30,000 on top of the existing 1% of first $60,000 subject to cap of $20,000 from OA etc
This will take effect from 1 January 2016.
This one is quite confusing because it involves an extra interest on top of extra interest.
The current rule is that an additional 1% per annum interest will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from OA. This works out to be 3.5% per annum earned on the first $20,000 in a member’s OA, and 5% per annum earned on the first $40,000 (up to $60,000 if no OA savings) in a member’s Special, Medisave and Retirement Accounts.
The new rule is that if you are 55 and older there will be another extra 1% is for the first $30,000
But the effective interest is lower for most people. The higher the account amount, the lower the effective interest. Also, the proportion of the RA / SA /MA account relative to the OA is important too. Let me demonstrate with some examples for those who are 55 and above.
Small Account Example
| Amount in CPF Accounts | *Base interest | Extra 1% of first $60K | Extra 1% of first $30K | Effective interest |
|---|---|---|---|---|
| CPF-OA $9,000 | 2.5% | 1% for the entire combine amount | 1% for the entire combine amount | (2.5% * 9000 + 4%*21000 + 1%*30000 + 1%*30000)/30000 = 5.5% |
| CPF-SA $1,000 | 4% | |||
| CPF-RA $10,000 | 4% | |||
| CPF-MA $10,000 | 4% |
Average Account Example
| Amount in CPF Accounts | *Base interest | Extra 1% of first $60K | Extra 1% of first $30K | Effective interest |
|---|---|---|---|---|
| CPF-OA $50,000 | 2.50% | 1% for ($20K from OA + $3K RA + $3k MA) | 1% for $30,000 | (2.5%*50000 + 4%*8000 + 1%*26000 + 1%*30000)/ 58000 = 3.67% |
| CPF-SA $0 | 4% | |||
| CPF-RA $3,000 | 4% | |||
| CPF-MA $5,000 | 4% |
BIG Account Example
| Amount in CPF Accounts | *Base interest | Extra 1% of first $60K | Extra 1% of first $30K | Effective interest |
|---|---|---|---|---|
| CPF-OA $330,000 | 2.5% | 1% is only for $60,000 | 1% is only for $30,000 | (2.5% * 330000 + 4%*161000 + 4%*42000 + 1%*60000 + 1%*30000)/533000 = 3.24% |
| CPF-SA $0 | 4% | |||
| CPF-RA $161,000 | 4% | |||
| CPF-MA $42,000 | 4% |
* It is important to note that the base rate is not guaranteed. SMRA base rate is at least 4% until 31 December 2015.
Conclusions
Overall, the CPF changes announced were small tweaks. The fact that CPF Life plans are going to be changed due to the reduction of deferred period to zero just means the goal post has shifted again. So whether will the CPF Life Basic or Standard (or whatever name they going to call it) is anybody’s guess.
What did not change is that the solvency of CPF Life is not guaranteed by Government. I wrote to Straits Times to complain about this ridiculous feature of CPF Life and the Ministry of Manpower replied stating that CPF Life members bear all the bankruptcy risk by having their CPF Life payout reduced. To me this is terrible from financial planning stand point.
Update 23 May 2015:
As written above, with effect from 1 January 2016, CPF Members only need to choose their CPF Life plan at their Payout age (i.e. at 65). However, those who have already selected their CPF Life plan are ‘locked-in’.
The Ministry of Manpower has clarified with Straits Times that members who have already picked their CPF Life annuity plan can now change their minds - but only on a case-by-case basis.
The Ministry “discourages members from doing so [by changing their minds], pointing out that those who have already committed their savings to CPF Life are not worse off.” (Source: Chance to change CPF annuity plans , MyPaper, 23 May 2015).
My advice:
For those who have just committed to a CPF Life plan, my suggestion is to appeal to have your CPF Life decision reversed so that you can have the flexibility to select the plan when you turn 65. The reason is because there is an assurance that you are not worst off whether to stay with your current plan or leave it in CPF-RA and thus deferring until 65. Given that the goal posts keep on changing nearly every year (i.e. CPF rules keep on changing), it is best to keep your options open and wait and see.
Of course, if there is a financial penalty to reverse the decision, that would be a different story.
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You’ll be stupid to opt for the Enhanced Retirement Sum, unless that $241,500 (as of July 2016) is only 1% or less of your retirement money.
By putting more money into CPF, you lose liquidity as those Retirement Sum will be used to buy CPF Life. Your money is as good as gone, becoz you cannot take out. You have to wait until 65 before CPF Life starts paying you monthly. And by 2020, the payout will not start at 65 — it will start when you’re 67 yrs old.
This scheme is to further transfer CPF solvency risk to you. CPF psycho you to put in more $$$$, but at the end of the day whether you get back depends whether CPF solvent or not.
CPF is amending CPF Life becoz too many people opting for Basic plan (which is better for individuals, but bad for CPF). This has thrown a spanner into the calculations of CPF — they thought enough suckers will simply close eyes and accept the default Standard plan. But more & more people waking up & being educated to choose Basic plan instead — this will eventually cause CPF Life to become INSOLVENT. So CPF needs to take corrective action and re-do the CPF Life plans.
Expect govt & CPF to announce worse CPF Life plans soon. They will try to present it in nice wrapping and tell you good stuff. But if you study the numbers & new regulations, you will find the amended CPF Life will be worse.
** Base CPF interest rates of 2.5% & 4% are “guaranteed” in CPF Act, as 2.5% and 4% is the lowest possible already. However govt can anytime change CPF Act in parliament to further reduce this base interest rates. So far they dare not do so, as it is far easier to simply print more SGD (via special SGS bonds) as long as SGD is stable, and don’t need to explain to angry Sinkies.
BTW, talking about solvency of CPF Life, besides reducing / cutting your monthly payout, the other thing govt will do is to delay the starting age for payouts. This approach is the one being tried by other developed countries.
I already alluded to this in my 1st reply above, but probably flew above the heads of most readers.
For S’pore, it is practically 120% confirmed that CPF Life payout age will increase from 65 to 67. According to sources, this will happen sometime in 2018-2020 and tie-in with the soon-to-be updated Re-Employment regulations.
The first re-employment regulations resulted in the Minimum Sum Withdrawal Age being delayed from 62 to 65 yrs old.
Remember that S’pore’s life expectancy is among the top 3 highest in the whole world, much higher than US, UK, Canada or Oz. Govt will constantly be fiddling with CPF law to adjust payouts and retirement sums etc to make the CPF Life self-sustaining i.e. without govt needing to rescue & top-up any shortfall.
Hi Wilfred Ling,
I am new here and have some questions on Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS). Presently, if my OA and SA accounts have enough money to opt for either when I reached 55, which would be a superior plan in term of return. Also, if both give same return, are there other important considerations for me to bear in mind before choosing the options. Also, do I have the option to delay beyond age 55 which of the two to choose from.
Lastly, if I choose ERS at age 55, and have an excess of 100k remaining thereafter the 161k transfer to my RA to purchase CPF Life, where will the CPF board place my excess 100k into if I decide not to withdraw the excess.
Thank you.
Under CPF rules, you do not need to withdraw the excess. However, whether is this a wise decision (and how much: ERS or FRS) depends on your financial situation, financial objectives, time horizon and risk tolerance.
(1) So, where do CPF transfer it to If I do not withdraw the excess after 55. To my OA, RA or ?
(2) Also, do I have the option to delay beyond age 55 which of the two (FRS or ERS) to choose from.
Thanks for replying. Have a good weekend.
The excess will not be transferred to anywhere. For more information and queries, you can always consult your financial adviser or CPF Board.
Hi Wilfred Ling,
Have an additional question to my earlier post to you:
You mentioned in your article: “However, the CPF Life plans will have to change to take into account that the deferred period is effectively reduced to zero” and “The fact that CPF Life plans are going to be changed due to the reduction of deferred period to zero just means the goal post has shifted again.”
I don’t quite get what you mean in the two quotes you mentioned. What is reduction of deferred period to zero?
Thank you.
This is because wef 2016 for those turning 55, it is no longer compulsory to select CPF Life plan type until 65. If 65 is the Payout age and the decision to select the plan type is also 65, it means the deferred period is 65 – 65 = 0.
Okay, got it! So, for those who can wait until 65 to choose their CPF Life plan type, Life Basic and Life Standard would provide the same return – is my take correct?
There is currently insufficient information on whether the Basic or Standard plan is better if the decision is postponed to 65. As mentioned above, both of these plans have to change to accommodate the deferred period to be zero.
Hi Wilfred
This is a very informative article. I have been reading the CPF Life website. If my OA+SA is not enough to hit the BRS at 55, my understanding is that I won’t get any payout at 65. However, when I use the CPF Life Estimator and input an amount such as $20,000, CPF Life Basic Plan provides a payout of $100-200.
Which is correct?
Thanks
Steve
Instead of asking so much questions, go read more carefully … and actually think.
Or pay someone to do the research & give you answers.