Here are the pros and cons of making voluntary CPF top-ups in 2020

When deciding to top-up funds into our CPF accounts, there are many things we need to consider. In a world grappling with the Covid-19-induced health and economic uncertainties, we really need to make good personal financial decisions.

While many articles may have already discussed the pros and cons of making contributions to our CPF accounts, we intend to tackle this question with the implications of Covid-19 on our personal finances in mind.

Pro #1 2020 is going to be volatile, and your Special Account (or Retirement Account) is one of the “safest “investments” around

Underpinned by a weakening global economy, many investment options are going to become a lot riskier in 2020. Even the traditionally safer investments in blue-chip stocks, bonds or properties may come under intense pressure.

Already, blue-chip stocks, represented by the 30 strongest and most liquid stocks on the Straits Times Index (STI), in Singapore have experienced volatile swings in 2020.

Since the start of 2020, the STI has dived as much 31 per cent and has subsequently recovered 17 per cent from there.

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Depending on the individual bond that we are invested in, the company that has issued the bond can become financially strapped due to Covid-19.

Even if they are able to continue making coupon payments, the risk of investing in these companies is going to be higher.

While this is especially relevant for companies that are within the industries directly impacted, including tourism, air travel, retail and others, other industries may also suffer from the weak economy going forward.

This is similar to property investments, as we may find it difficult to rent out properties due to imminent squeeze in the jobs market even after the circuit breaker has been lifted.

Pro #2 Continue to receive good and stable returns

Returns on our CPF Special Account and Retirement Account start from 4 per cent per annum (p.a.).

For the first $60,000 of combined CPF balances that we have, we also earn an additional 1.0 per cent p.a. For those above 55, the first $30,000 of combined CPF balances earn an extra additional 1.0 per cent p.a.

Furthermore, the returns we receive from CPF are virtually risk-free. We also enjoy the certainty that we will continue to earn this returns for a relatively long period of time.

While investing in stocks and bonds can deliver superior returns in the long-term. The short- and long-term certainty we get from topping up our CPF account can give us a good sleep at night, especially in times of great uncertainty and volatility, such as now.

Pro #3 Tax savings on CPF top-ups

As 2020 is going to be a financially difficult year, it may be wise to bolster our finances by spending less, and making our funds work even harder by saving on taxes and earning a decent annual interest by contributing to our CPF accounts.

Under the Retirement Sum Topping-Up (RSTU) Scheme , we can earn a dollar-for-dollar tax relief by contributing up to $7,000 into our Special Account or Retirement Account.

We can also earn a further dollar-for-dollar tax relief by contributing another up to $7,000 to our loved ones’ Special Account or Retirement Account.

Con #1 You may experience a cash flow crunch

One of the main drawbacks of making a top-up to our CPF accounts in 2020 is that we may experience a cash flow crunch. If we haven’t already been retrenched, put on no-pay leave or asked to work on reduced wages, it does not mean we are in the clear.

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In fact, the current jobs market is already being bolstered by the government through the Jobs Support Scheme. After the circuit breaker is over, the health emergency may diminish. However, the economic problems may just be beginning.

Companies will have to grapple with a weakened economy locally and globally. This will likely hurt hiring packages and existing wages.

Contributing to our CPF early in the year may expose us risks if we happen to be retrenched, put on no-pay leave or have our wages reduced later in the year.

Even if we are not impacted this year, the economic fallout is likely to last beyond 2020, and we may experience the cash flow crunch next year.

If we have already contributed the money into our CPF, there is no way to reverse this action to tap on the funds to overcome any potential cash flow problems in the coming months.

Con #2 You may not save that much in taxes

Due to the reasons above – retrenchment, put on no-pay leave or working on reduced wages – there is a likelihood we may save less in our taxes by not earning as much this year.

This also is because of how tax brackets work – the more we earn, the higher our tax bracket, and the less we earn, the lower our tax bracket.

Moreover, many of us may have also incurred many more work-related expenses during the year, that we may be able to claim a tax rebate on when we file our taxes in 2021.

This would typically be due to our work-from-home arrangements this year, including upgrading our home office, which didn’t exist in the first place, and may also include things like purchasing a laptop, routers or WiFi extenders, a good chair, subscribing for Zoom or other video conferencing apps, and may even allow us to claim rent on the space we are using if we are renting our home.

Consider Covid-19’s impact on your personal finances before committing to CPF top-ups

The pros and cons we weigh up before making CPF top-ups can be very different this year, especially as swathes of the economy will come under pressure.

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Even if the industry we work in is not currently facing any setbacks, the general slowdown in the economy will translate to increasing pressure on all companies going forward.

At the same time, this may not be the time to aggressively invest in the markets, especially if we do not have a full understanding or do not want to experience huge volatility in the markets.

Being prudent with our finances, includes making CPF top-ups, should be our primarily goal.