CPF: The bedrock of the Singapore dream

Most salaried employees in Singapore would have 37 per cent of their income going to their CPF accounts. When broken down, that’s 20 per cent contributed by yourself and 17 per cent from your employer.

As a quick recap, here’re the three main uses of CPF :

• Healthcare
• Housing
• Retirement

They are all really big-ticket items so you’re probably wondering… are there any tips for me to maximise my CPF ?

There is!

In fact, I covered this topic with Hariz Maloy, our Seedly Community’s Level 10 Contributor,  as part of our MONEY FM 89.3 x Seedly Radio Series.

Here’s the full podcast if you’re interested.

If you prefer actionable tips that you can refer to and act on immediately , here’s what Hariz and I put together over a recent lunch meeting!

TL;DR: Here are the 8 CPF hacks to get you ahead

1. Upgrade your MediShield Life to an Integrated Shield Plan (ISP) from a private insurer
2. Understand the new CareShield Life for everyone who turns 30 (disability insurance)
3. Keep $20,000 in your Ordinary Account instead of wiping it all out when you purchase your first flat
4. Consider using cash payments for mortgage payments instead of OA monies
5. Invest your OA money with CPFIS (CPF Investment Scheme) or transfer money from OA to SA
6. Top up your Special Account (SA) with cash
7. Understand what happens to your CPF monies at 55
8. Start a Supplementary Retirement Scheme (SRS) account with just $1

How can I hack my CPF?

Disclaimer: The following tips and hacks are merely guides for individuals looking to maximise their CPF.

They do not constitute advice that should be followed blindly. When it comes to managing your money – as always – do your research and always read the terms and conditions before executing anything. When it comes to CPF, there might be steps that are sometimes irreversible.

Healthcare

The first two aren’t necessarily ‘hacks’.

But they are extremely important and play a huge part in making sure we can focus on the other hacks without worries.

Hack 1: Enhance your MediShield Life with an Integrated Shield Plan from a private insurer

MediShield Life is like basic healthcare which every Singaporean has.

Once you understand what it is, you can consider enhancing it with an Integrated Shield Plan from a private insurer.

• This is really important because you get access to higher non-subsidised wards*
• You don’t have to opt for private hospital cover if you don’t want to , but a Class A ward in a government hospital should be considered especially if you’re increasing the yearly claim limit from $100,000 (under MediShield Life)
• With this, if you do get hospitalised, the benefit of IPs is that if you choose to stay in a non-subsidised ward, the higher coverage of your IPs would help to reduce the amount you would need to pay from their MediSave.

* Note : For normal MediShield Life, treatment will also not be delayed for urgent cases, for those who visit subsidised settings.

If you’re someone who hasn’t looked into your insurance coverage, you might want to find out the key insurance policies that you need to get as well!

Hack 2: Auto-enrolment into the upcoming Careshield Life for everyone who turns 30 (disability insurance)

There is a NEW and coming Careshield Life .

Young adults may not like to think about this… since it concerns your mortality.

But you will be automatically enrolled into this new Long Term Care program once they turn 30 and for everyone who’s already in their 30s next year, you’ll be automatically enrolled as well.

• Careshield Life is the new iteration of Eldershield that used to only start when you’re 40. Premiums were paid over 25 years with benefits providing you $400/mth for 72 months should you fall permanently disabled.
• This money is meant to provide for an increase in expenses due to Long Term Care such as nursing and transportation costs.
• Now premiums are paid over 37 years and you get $600/mth for life with an escalating 2per cent benefit yearly.
• There will be an option to increase coverage via a private insurer’s supplementary plan like Eldershield had, and this should also be considered as a portion of premiums can be paid by MediSave.

ALSO READ: CPF Shielding Hacks (Special Account & Ordinary Account): Do they really make sense?

Housing

Fun fact: Singapore has one of the world’s highest concentration when it comes to home-ownership.

Hack 3: Keep $20,000 in your Ordinary Account instead of wiping it all out when purchasing your first flat

HDB has a new rule that allows you to keep $20,000 in your Ordinary Account instead of wiping it all out when purchasing your first flat.

It was introduced in 2018, and personally, I also did this because I would want the flexibility to also have that extra reserve just in case I got retrenched or out of a job and I still would have to service my CPF mortgage.

This new rule is fantastic because:

• Your first $20,000 in your Ordinary Account earns an additional 1 per cent interest which makes it 3.5 per cent. That’s a guaranteed $700 in a year.
• It gives you flexibility (as described above for most couples who bought their first property)

Hack 4: Consider using cash payments for mortgage payments instead of OA Monies

We first need to understand about the CPF Accrued Interest when using your OA Monies for your home purchase.

CPF is meant for retirement and that means any monies used for your home has to be returned to your own CPF with interest.

Think of it this way, if you hadn’t used money in your OA, it would earn an interest paid by CPF.

But since it’s not there, it lost out on that interest, so you have to compensate and pay that interest.

But don’t worry, upon the sale of your home, the accrued interest will be deducted from the proceeds of your flat to your OA but if you were to purchase another flat right after, you can use that money immediately again.

So here’s the flexibility.

If you do decide to use cash to pay your mortgage, and one day you might be unable to for whatever reason, you can then switch to pay via Ordinary Account and tap on the money you have kept aside there.

There are pros and cons to this:

• So if you are confident in investing your cash at hand and believe you can probably earn higher than a 2.5 per cent per annum return, it may be better to use your Ordinary Account money.
• But if you aren’t that confident in investing cash, you can then pay with cash and start accumulating your Ordinary Account and take advantage of that 2.5 per cent guaranteed return.

Now if let’s say you paid with cash and grew your Ordinary Account to a sizeable sum, what should you do with it?

We proceed on to the idea of planning for Retirement – which is also a famous blogger in Singapore (1M65 actually believes in as well, to maximise the CPF system to accumulate at a faster pace)

ALSO READ: CPF moves to make before 2020 ends: Enjoy tax relief and grow your retirement savings

Retirement

Your nest egg, and the main reason why CPF was created in the first place.

Hack 5: Invest your OA Money with CPFIS (CPF Investment Scheme) or transfer money from OA To SA

Now you have 2 options here. But both of them provides you with potentially higher return than leaving money in your Ordinary Account.

Option 1: CPFIS (CPF Investment Schemes) – More risky

• With the CPFIS programme, you can invest your excess OA monies which is any amount above the $20,000 in your OA into a few investment products. They are stocks on SGX, Gold, Unit Trusts, and Investment-Linked Policies.
• Good news is that CPF has recently made it cheaper for you to invest your money in the last 2 options, reducing sales charge on Unit Trust and ILP products from 3 per cent to 1.5 per cent and soon to 0 per cent next year, and the ongoing advisory/management fee from 1 per cent to 0.7 per cent to 0.4 per cent.
• With a curated list of products from CPF, a good portfolio allocation and choice of funds, you have the chance to perform better than the 2.5 per cent provided by your Ordinary Account. But of course this requires you to take some risk with your retirement funds.

Option 2: Transfer from OA to SA – Less risky

• Your other and safer option, you be to transfer your Ordinary Account monies to your Special Account. Your special account earns a higher interest at 4 per cent with the first $40,000 earning an additional 1 per cent interest. That means that first $40,000 in your Special Account gets a guaranteed $2,000 every year.
• However, do note that this transfer is irreversible, and you will lose out on the ability to use that money to pay for your mortgage or child’s education in the future.
• But if you’re not transferring monies from OA to SA, you can choose another option.

Hack 6: Top up your Special Account (SA) with cash

There are a few ways to top up your CPF monies:

• One way would be through the Voluntary Contribution (VC) scheme that allows you to top up $37,740 split into the 3 CPF accounts.
• The other way would be via the Retirement Sum Top Up (RSTU) Scheme that allows you to top up your Special Account up to the Full Retirement Sum of the year, for 2019 this is $176,000.
• Other than making sure you earn a guaranteed return, you also can get tax relief of up to $7,000 by topping up to your Special Account. You can also get an additional $7,000 tax relief for another family member (eg parent or parent-in-law)

Again, this top up is irreversible, but it provides you with a great safety net as you know you’ll have money in your retirement years.

Hack 7: Understand what happens to your CPF monies at 55

There’s a big misconception that money in CPF cannot be withdrawn or that we will get a small amount back every month. This can be further from the truth.

• See at 55, a new CPF account is created for you. The Retirement Account . The retirement account is then filled up by withdrawing your Special Account and Ordinary Account monies to build the Full Retirement Sum. This year that is $176,000 as mentioned previously. Any excess monies above this can now be fully withdrawn.

An example: If you have $1,000,000 in your OA and SA and you’re 55 years old today.

• You can withdraw $824,000 in cold hard cash. Or choose to leave it in their respective accounts to still earn a good interest.
• At the age of 55 when your ability to take risk decreases by a significant amount, find a guaranteed risk-free 2.5 - 4 per cent return that is flexible is close to impossible.
• And remember that $176,000, that will provide you with a $1,400/mth payout from 65 for life. Even if you live till 110. Sounds pretty good to me.

Hack 8: Start a Supplementary Retirement Scheme (SRS) Account with just $1

If you’re bored by now and can only walk away remembering one hack, we hopefully wish it’s this one.

• Open a Supplementary Retirement Scheme Account with one of the partner banks with just a $1.
• This single dollar will lock in the retirement age for your account which is also tied to the age where you can have penalty free withdrawals from the SRS account.
• And currently, this is 62 years old. and it will go up gradually from 62 to 65 by 2030. So skip out on buying a KitKat today and open an SRS Account.

What on earth is this SRS account?

• Well the main use of the account is to help reduce taxable income by up to $15,300 every year, potentially saving you thousands of dollars in tax every year.
• And this $15,300 can also be invested in stocks on SGX, Unit Trust investments, and Insurance Endowment and Annuity Products.

There is a little research that needs to be done here by you, but if you learn how to utilise SRS well, you can save on tax and have a tax-free withdrawals after you retire.

This article was first published in Seedly.