What is CPF and how is it relevant to my parents?
As born and bred Singaporeans or Permanent Residents (PRs), many – if not all of us – have heard of the Central Provident Fund, otherwise known better by its abbreviation: CPF. The CPF is lauded as one of the best pension schemes globally. Over the years, it has undergone numerous changes in its aim to best provide financial security for Singaporeans and PRs for life. How does the CPF help in achieving that aim?
Your CPF is split into different accounts: the Ordinary Account (OA), MediSave account, and the Special Account (SA). These accounts can be used for different purposes, such as for healthcare payments, housing, and of course, for building an income source for retirement. While you are working, there is a tax-exempt mandatory contribution made to these accounts by your employer, and also by yourself, which is deducted through your salary and distributed to these accounts.
The self-employed are not exempted from such contributions as well, though only MediSave contributions are compulsory. Funds in the OA and SA enjoy a risk-free return of an interest rate of 2.5% for OA balances, and 4.0% for SA balances. OA balances can be used for various purposes, such as purchasing housing, funding education and insurance policies, and investing. With the SA, there is less flexibility, and you are only able to invest a portion of your SA. MediSave can be used to pay for healthcare, dental care, MediShield Life premiums and medical insurance premiums when needed.
When individuals reach 55 and 65 years of age, two major CPF milestones occur.
At 55 years old, a Retirement Account (RA) is created. This account is where the bulk of the individual’s savings-to-date in CPF goes to, and grows steadily with a compound interest rate of 4.0 to 6.0% for another 10 years, until the individual is 65 years old. Then, at 65 years of age, the individuals are given the option to decide whether or not they would like to opt in for CPF LIFE. CPF LIFE is Singapore’s annuity scheme, and individuals who enter this scheme will receive a lifelong monthly payout for as long as they live. By understanding this process as well as possible, you can help your parents (and yourself) better plan for retirement.
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Why maximise your parents’ CPF?
As our parents grow older, it may be a good idea to maximise their CPF, and here are some reasons to do so.
Grow your parents’ retirement funds for the long term
As we saw above, putting in money into your parents’ Retirement Account (RA) can help them earn guaranteed and better returns on capital, due to the high, risk-free returns. For seniors above the age of 55 years old, they can earn up to 6.0% interest on their deposits in CPF per year. This means that if your parent has not reached the age of 65 years old, there are even more years to make higher returns on the initial amount deposited. This would help your parents in the long term during their retirement, where they can enjoy an increased monthly payout. This can help to better fight the effects of inflation as well. Moreover, CPF LIFE ensures lifelong payout, which means that you can be rest assured your parents will receive a lump sum monthly for the rest of their lives.
Enjoy potential tax deductions
Under the Retirement Sum Topping Up Scheme (RSTU), you can top up your parents’ CPF RA and obtain tax relief of up to $7,000 per calendar year. However, this tax relief takes into account contributions made to other top-ups made to the CPF accounts of other family members or dependents as well. This would imply that to optimise the tax benefits, you can only top up $7,000 to your parents’ CPF RA or $3,500 per parent a year. Beyond this level of top up, you will not reap additional tax relief. From 1 Jan 2022, this amount will change to $8,000 per calendar year.
How to maximise your parents’ CPF?
There are various ways in which you can maximise your parents’ CPF.
Use the CPF Retirement Sum Topping-Up Scheme (RSTU)
Through the CPF RSTU, you can now top up to your parents’ Special Account (if they are below the age of 55), or top up to their Retirement Account (if they are above the age of 55). This can be done via a CPF transfer from your own CPF savings or a cash top-up. The money deposited via this scheme is strictly set aside for retirement purposes and cannot be withdrawn in cash after 55 years old, or used for other purposes like investment, housing, or education. To transfer your CPF savings to your parents, your CPF balance has to exceed the Basic Retirement Sum (BRS). This ensures that you have sufficient CPF savings for yourself in the future.
Use the Matched Retirement Savings Scheme (MRSS) if eligible
If your parents are between 55 to 70 years old, and meet the criteria, they may be eligible for the MRSS which was started in 2021. MRSS aims to help senior Singapore Citizens, who have not reached their Basic Retirement Sum (BRS) build their retirement savings. The Government will match every dollar of cash top-ups made to the RA of eligible members up to $600 per year. This means that if you top up your parents’ RA and they are eligible for this scheme, you would be helping them to maximise the payout for their retirement in the long term. Moreover, the cash top-ups and matching grant earned from the Government earns attractive CPF interest rates of up to 6% per year, which further maximises your parents’ CPF.
Make a voluntary contribution to your parents’ CPF
If your parents’ CPF contributions have not reached the annual limit of $37,740, you can make a voluntary contribution to your parents’ CPF accounts to help boost their CPF funds. This adds on to their retirement funds as it can earn more compounding interest on the initial sum deposited each year.
Avoid withdrawing money from their CPF accounts
At 55 years old, regardless of how much CPF savings are in their account, senior citizens who are Singaporeans and PRs can withdraw a lump sum of $5,000 from their CPF accounts. At 65 years old, this withdrawal amount increases to 20% of their RA balances, inclusive of the initial $5,000 withdrawn as well. If your parents do not need the money, you can encourage them to leave it in CPF to let the funds grow as interest compounds, building up a larger retirement sum as they grow older. If your parents are fit and healthy, and are able to work and wish to still work at 65 years old, they can also continue to grow their CPF by deferring their enrolment into the CPF LIFE scheme until they retire or hit the age cap of 70 years old. As salary will be credited into their CPF accounts, the interest on the sum in the CPF accounts will be greater. Moreover, they can accumulate a greater eventual monthly payout when they opt in for CPF LIFE, which guarantees monthly payouts for a lifetime.
Transfer your parents’ CPF savings from OA to SA or RA
The Special Account or Retirement Account earns more interest than the Ordinary Account. Helping your parents to transfer their unused OA balances to their SA or RA will help them to earn additional interest of 1.5% returns per year on their money. As the years go by, this compounding interest can make a great difference to your parents’ CPF LIFE monthly payouts, thereby increasing funds available for retirement and maximising their CPF.
Is a top-up reversible or can it be refunded to me?
Cash top-ups and CPF transfers are irreversible. Savings in SAs and RA earn a higher interest rate of 4% per year as they are locked in for the long term. This is similar to market practice of locking in fixed deposits for higher interest earnings, compared to savings deposits which are withdrawable.
If the recipient of the top-up passes away, there are various situations which could occur:
- If a cash top-up was made on or after 1 Nov 2008, the cash top-up will be treated as cash gifts to the recipient and remaining cash top-up(s) will be paid to the recipient’s nominees based on his or her CPF nomination.
- If a cash top-up was made before 1 Nov 2008, the remaining top-up money will be given back to the giver’s OA. If the giver has passed on, the top-up money will be paid to the giver’s nominees based on his or her CPF nomination.
- If a CPF transfer was done from the giver to the recipient, any remaining transferred money from the recipient’s account will be returned to the givers’ originating CPF account(s). Likewise, if the giver has passed on, the cash top-up will be paid to the giver’s nominees.
Maximising your parents’ CPF accounts may be a good long-term solution of ensuring they are comfortable and well-prepared for their retirement.
However, it is also important not to neglect their MediSave account. MediSave is Singapore’s national medical savings scheme that helps Singapore Citizens and PRs pay for their own or their immediate family’s medical care expenses. This can include hospitalisation fees, outpatient or day surgery expenses, and even healthcare needs for the elderly.
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- Central Provident Fund. (2021, October 27). CPFB | Top-ups for loved ones, employees and others. CPFB | Top-Ups for Loved Ones, Employees, and Others. https://www.cpf.gov.sg/member/growing-your-savings/saving-more-with-cpf/top-up-to-enjoy-higher-retirement-payouts/top-ups-for-loved-ones-employees-and-others
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- Lou, K. (2020, December 30). Here Are 8 Secret CPF Hacks And Tips That All Singaporeans Need To Know. Seedly. https://blog.seedly.sg/cpf-hacks-tips-for-singaporeans/
- Poh, J. (2021, August 3). Everything You Need to Know about Your MediSave Account in 2021. NTUC Income. https://www.income.com.sg/blog/medisave-things-to-know
- Tan, S. (2021, November 4). 5 changes to CPF rules: More flexibility for transfers, quicker disbursement of funds. The Straits Times. https://www.straitstimes.com/singapore/politics/five-changes-to-cpf-rules