3 Important Facts About Our CPF

3 Important Facts About Our CPF

*All appended information are not intended to be, and do not constitute to be financial advice in any sense. Do consult your advisor for in-depth understanding. Refer to CPF Official Website for more details.

Our Central Provident Fund (CPF) System is one of the World’s most recognized pension schemes, financed by the contributions from both employers and employees.

As a mandatory social security savings plan, CPF helps Singapore citizens and permanent residents save for retirement, with relatively attractive risk-free interest rates. This system also helps to set aside funds for other purposes such as healthcare, home ownership, family protection and asset enhancement.

With persistent debates going on about our country’s unique social security system, everyone has a different opinion on whether CPF is a good or bad thing. But before we come to that conclusion,  here are three important facts you should know about CPF!

FACT #1 –  CPF is composed of multiple accounts

Let’s start with the basics! Every CPF account holder should know this piece of fundamental knowledge. If you are under the age of 55, you would only have 3 accounts in your CPF Savings, which are:

Ordinary Account (OA)

Primarily used for housing, insurance, investment and education payments

Special Account (SA)

Purposed for retirement-related savings and financial products

MediSave Account (MA)

Purposed for hospitalisation expenses and approved medical insurance

As of today (March 2020), OA earns up to 3.5% interest p.a., while SA and MA earn up to 5%. These rates include 1% p.a. extra interest on the first $60,000 of combined CPF balances, with up to $20,000 from the OA.

For each CPF contribution (37% of your salary), the breakdown of allocations are as follows for Singaporeans / PRs aged 35 and below, and will change as we grow older.

Source: CPF Website

Finally, the fourth and final account is the Retirement Account (RA), which is created automatically on our 55th birthday! Savings in our SA and OA, up to the Full Retirement Sum (FRS), will be transferred to the RA to form our retirement sum. This account earns up to 5% interest  p.a., and provides monthly pay-outs for retirement.

FACT #2 – You DON’T always earn the extra 1% on your first $60,000 CPF balances

Although this additional 1 per cent may sound really enticing, keep in mind that it is only applicable to the first $60,000 – and merely up to $20,000 from our OA. For many young adults who have just entered the workforce, the majority of our CPF contributions (~62%) would be accumulated in the OA. while a considerably smaller amount goes into SA and MA.

To put it into perspective, let’s think of this scenario. Assume Bob has just started working, and rakes in a salary of $3,600 a month. This would mean his total CPF contribution is $1,332 per month (37% x $3,600) – from which $1008, $288 and $216 would go into his OA, MA and SA respectively.

After 2 years, although Bob’s OA would have already surpassed $25,000, he would only be able to earn an additional 1% interest on $20,000. On the other hand, with Bob’s MA and SA combined, there would only be an accumulation of about $13,000. It would take a number of years for Bob to accrue $40,000 in his MA and SA, to maximise returns from the extra 1%.

In this case, it might be wiser for Bob, and young working adults in general, to top up their CPF accounts to reach $60,000 of combined CPF savings.

FACT #3 – You CAN transfer all your OA savings into your SA

Now that we’ve established the attractive rates on the Special Account, you might be thinking: “ can I move all my money from the OA to my SA?”. Well, you can!

That said, you would have to: (1) be below 55 years old, and (2) have less than the current Full Retirement Sum in your SA, which includes net savings withdrawn under the CPF Investment Scheme – Special Account (CPFIS-SA) for investments that have not been completely disposed of.

While below the age of 55, if you have a zero balance OA, the first $60,000 in the SA will earn 5% interest p.a., while the remaining balance will enjoy 4%.

However, do note that all transfers from OA to SA are irreversible! If you would like to use your CPF for purposes such as payments for housing, education or investment in the future, you might want to leave some savings in your OA. Plan carefully, and consult your advisor if you require assistance, or simply an added perspective.

Otherwise, just go for it and take full advantage of the higher interest rate to amass your retirement funds, and get ready for a happy retirement!

That’s all folks! Hope this was helpful for you in planning for your future finances. Remember to plan thoroughly and be cautious with where you put your money!