CPF top-ups hit all-time high of $4b in 2021: Should you top up your CPF too?

There was a time when #givemebackmycpf was a thing. These days, people are voluntarily giving their money to CPF instead.

In 2021, CPF top-ups hit a new annual record of $4 billion, with more than 220,000 people topping up their own or a family member's CPF accounts. Yes, you heard that right, hundreds of thousands of people voluntarily paid their hard-earned money into their CPF accounts. That's quite a U-turn from the heady days when CPF was viewed as an oppressive way to lock up Singaporeans' life savings.

What's with all the top ups? And should we be doing it, too?

What are CPF top-ups?

For those who have yet to join the working world, CPF is a national savings scheme that Singapore citizens and PRs are automatically enrolled in.

When you start working, your employer will automatically pay a percentage of your monthly salary into your CPF accounts — the Ordinary Account (OA), Special Account (SA) and MediSave Account (MA). (When you turn 55, your OA and SA will merge to form the Retirement Account (RA)).

For those aged 55 and below, a total of 20 per cent of your wage gets deducted. So, if your official salary is $4,000 a month, your 'take home pay' is actually only $3,200, with $800 getting deposited into CPF.

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The reason some people have an issue with CPF is that once the money goes in, it can’t come out until you get old enough to make withdrawals. There are some ways you can use the CPF funds (like buying property), but you won’t have the liberty to access it as and when you like.

The CPF system is the government’s way of safeguarding financial stability for Singaporeans. The MA is meant to be used for medical expenses, while the OA and SA are ostensibly for retirement savings, although the OA can be used to buy property, too.

In practice, Singaporeans mainly use CPF funds to pay for their homes, whether BTO flats, resale flats or condos. Funds deposited in MediSave are used for medical costs or Integrated Shield Plan (IP) premiums. And eventually, when you retire, CPF is meant to pay out a lifelong income stream through the CPF Life scheme.

Why do CPF top-ups?

Now that you know what CPF is used for, you might be wondering why someone would want to top up their CPF account. After all, isn’t it easier to just keep the cash on hand?

There are three main reasons:

1) Retirement

Under the CPF Life Scheme, CPF members can receive a monthly income starting from their payout age until the day they die.

The payout amount will be determined based on the amount of money in your CPF account. So, if you want to enjoy higher payouts, it can make sense to pay your spare cash into CPF instead of leaving it in a bank account. That’s because CPF Life gives you the guarantee of lifetime payouts, whereas the money if left in a bank account might run out of you live too long.

2) Interest rates

CPF offers very attractive, virtually risk-free interest rates. For those under the age of 55, CPF interest rates are currently 2.5 per cent for OA and four per cent for SA and MA. Plus, there’s an extra one per cent interest on the first $60,000 worth of combined balances (capped at $20,000 for OA).

By contrast, in the current low interest rate environment, you’d be very lucky to even get 0.5 per cent from a high interest savings account.

3) Tax relief

IRAS doles out up to $8,000 worth of tax relief (from Jan 1, 2022) for the good citizens who make top ups to their CPF SA/RA and MA.

On top of that, there’s another $8,000 worth of tax relief up for grabs if you to up a relative’s SA/RA and MA.

CPF top up: OA or SA?

There are a few ways to top up your CPF account voluntarily. No matter which you choose, the CPF contribution ceiling is $37,740 per year. This includes any mandatory CPF contributions.

You can choose to top up all three accounts, or only your SA or MA. But you cannot top up only your OA.

Topping up your SA can be smart if you’re gunning for a better retirement nest egg through CPF, as the SA interest rates are vastly superior to those of the OA. If you are sure you don’t need the money to buy property with, you can even transfer your OA savings to your SA. This transfer is not reversible.

As for topping up all three accounts in order to contribute to your OA, that depends on whether you think the OA interest rate is attractive enough for you to lose the liquidity of your money. Some people take this route in order to make it more convenient to buy a home later on. But bear in mind that you’ll have to trap more money in your SA and MediSave in order to do this.

a) Top up all three accounts

The only way you can top up your OA is to top up all three accounts at the same time. Such top-ups are not tax deductible.

The money you transfer you will be allocated in the following proportions:

So, let’s say you’re a 30-year-old who transfers $1,000 to all three CPF accounts. The allocation will be as follows:

• OA: $1,000 x 0.6127 = $621.70
• SA: $1,000 x 0.1621 = 162.10
• MA $1,000 x 0.2162 = $216.20

b) Top up your SA only through CPF Retirement Sum Topping-Up Scheme

This scheme lets you top up only your SA/RA.

You can also use this scheme to make top-ups for loved ones.

This is tax deductible, yay!

c) Top up your MA only

Self-explanatory.

This kind of top-up is tax deductible too.

CPF top up for tax relief

As mentioned earlier, you can get up to $8,000 (from Jan 1, 2022, up from $7,000) for voluntarily topping up your SA or MA voluntarily.

You can also claim up to $8,000 worth of tax relief for making SA/RA top ups to a parent/parent-in-law/grandparent/grandparent-in-law or qualifying spouse/sibling.

Any amounts must not exceed the Full Retirement Sum (for SA) and the Basic Healthcare Sum (for MA) in order to qualify for tax relief.

The amount of tax relief is the same as the amount you have topped up the account with. So, let’s say you top up your SA with $5,000 through the Retirement Sum Topping-Up scheme. This entitles you to $5,000 worth of tax relief.

So, if your annual income is $40,000, after applying the tax relief you will only have to pay taxes on $35,000.

CPF top up tax relief: 2022 updates

From Jan 1, 2022, the government has raised the maximum tax relief from $7,000 to $8,000 when you voluntarily top up your SA/RA and MA.

The maximum tax relief for topping up a family member’s SA has also been raised from $7,000 to $8,000.

How to top up your CPF

Luckily, everything is online these days. You can make a one-top time-up simply by filling up this form. Select "Member" if you’re making a RA or SA top-up. It’s that easy!

Just make sure you disable all pop-up blockers and raise the limits on your internet banking eNets or d2Pay before you start the whole process.

CPF top up for your parents

You can either top up your parents’ account with cash or make a transfer from your own CPF account.

Both can be done here. Select "Member" and "Top up my own/recipient’s RA under the Retirement Sum Topping-Up Scheme" or "Top up my own/recipient’s SA under the Retirement Sum Topping-Up Scheme".

The most compelling reason to top up your CPF is if you’re planning to beef up your SA balance for retirement in line with your long-term plans. The earlier in your life you do this, the more you can take advantage of those juicy interest rates.

However, be aware that any transfers to CPF are irreversible. You should thus make sure you have a healthy cash flow situation before you make the fateful transfer.

READ ALSO: How much do you really need to buy your first condominium in Singapore?

This article was first published in MoneySmart.