CPF Special Account closure forces a rethink of retirement planning

The original version of this article first appeared in CNA. ‍

For the past week, conversations on social media platforms have swirled around retirement adequacy after a surprise announcement in Budget 2024. Financial forums were abuzz with an alphabet soup of acronyms such as OA, SA, RA, BRS, FRS, ERS and SRS, along with pro-tips on how members could maximise their Central Provident Fund (CPF) retirement savings.

The pending closure of the CPF Special Account was arguably the biggest surprise coming out of Budget 2024. What is the Special Account for, and why has its closure caught attention?

The Special Account - meant for retirement savings and investments - has traditionally earned CPF members long-term yields, with a current interest rate of 4.08 per cent per annum (but this will change to 4.05% in the second quarter of this year).

From 2025, the Special Account will be scrapped for those aged 55 and above. When that happens, savings from members’ Special Account will be transferred to their Retirement Account, up to the Full Retirement Sum (currently set at S$213,000 for 2025). Any remaining Special Account savings will be transferred to their Ordinary Account, which currently earns 2.5 per cent per annum.

The Enhanced Retirement Sum - the maximum amount that Singaporeans can place in their Retirement Accounts to secure the highest CPF Life payouts - will also be increased to four times the Basic Retirement Sum. This means the Enhanced Retirement Sum will be S$426,000 in 2025. CPF members can voluntarily top up their Retirement Accounts to earn a higher interest rate (currently at 4.08% per annum, but will also be 4.05% in the second quarter of 2024) than the Ordinary Account.

The announcement has left Singaporeans scrambling to recalibrate their expectations for their expected retirement nest eggs, with young and senior workers as well as retirees alike posing the questions: “What does this actually mean? Without the Special Account’s long-term interest rate, will I be able to build enough reserves for retirement?”

The purpose and intent of CPF

In a post-Budget panel discussion on CNA's Ask the Finance Minister programme on Wednesday night (Feb 21), Mr Lawrence Wong addressed the move to close the CPF Special Account and the reactions it drew online.

The measures, he said, are “very much in line with the purpose and intent of the CPF”.

As a compulsory savings scheme, CPF is designed to help Singaporeans support and take care of themselves in retirement.

Due to the prevailing yields on the Special Account, it’s not uncommon for CPF members to make cash top-ups or transfer savings from their Ordinary account to their Special Account. In doing so, they can obtain a higher long-term interest rate while building a nest egg large enough to enjoy the highest possible monthly payouts in future retirement. This results in a higher-yielding account that can be withdrawn on demand after they turn 55.

This latest adjustment now renders the second objective moot. How should the everyday person begin to approach post-Special Account retirement planning?

No Special Account, no worries

Amid elevated interest rates and soaring costs of living, young and senior workers, as well as retirees alike, need to understand how the future value of money may change and how this could impact their quality of life and financial security during retirement.

It is only prudent to ensure our CPF savings work hard for us. This can be done by investing part of those savings in low-cost, globally diversified and risk-appropriate portfolios. This allows compounding and growth in your wealth while outpacing inflation, which erodes purchasing power. Investors will be compensated with higher expected returns for taking on more risk over a long investment horizon.

Following the cessation of the Special Account, CPF members may also wish to consider opening a Supplementary Retirement Scheme. The Supplementary Retirement Scheme is a voluntary scheme that complements the CPF and is managed by the private sector.

The contributions, which are eligible for tax relief, can be used to purchase various investment instruments.

That said, the choice is not binary between a lower-risk plan (transfers and Special Account top-ups) and a higher-risk plan (investing savings in the Ordinary Account and Supplementary Retirement Scheme). These should be taken as one holistic strategy.

In deciding the allocation, one should first consider your specific wealth objectives as well as current and future financial conditions. This includes, but is not limited, to knowing your pre- and post-retirement needs and risk appetite.

Why does this matter to me? Retirement is still far off

Young adults may be inclined to feel they have 30 or 40 years before they hit retirement age and thus feel little urgency to immediately search for an alternative for the higher Special Account yields. But the changes to the CPF scheme are as relevant to young adults, if not more so.

First, it’s important to keep in mind that the CPF scheme with its structure and rules may continue to evolve, as the Singapore government tries to help citizens secure their retirement and financial future.

Second, young adults have time on their side to make hay while the sun shines. With a longer horizon, they can take proactive steps to take control, protect and grow their retirement nest egg, including their CPF funds, to sufficiently support their future.

Investing isn't for me as I'm reaching the retirement withdrawal age soon

The dangers of inflation eroding one’s nest egg are not isolated to young adults.

Singaporeans are not just getting older; we are also living longer. When Singapore became independent in 1965, the life expectancy at birth was 65 years. Residents can now expect to live, on average, to about 84 years of age.

With a longer runway, even “young seniors” in their 50s and 60s will have decades to live, necessitating careful retirement financial planning amid the rising costs of living.

Also announced in Budget 2024, the CPF contribution rates for those above 55 years to 65 years will be increased by a further 1.5 percentage points in 2025. These are funds that should be continually managed to beat inflation.

The truth is, there are ample investment options that can align with one’s goals. Markets do not discriminate as everyone benefits from investing in a balanced and diversified portfolio and compounding will do the heavy lifting for one to grow the returns over time.

Be risk aware, not risk averse

Anecdotally, it seems that many are conservative about investing their CPF savings.

As of end-2023, members’ balances in CPF totalled about S$571 billion. In contrast, only S$31.3 billion from Ordinary and Special Accounts were being invested. These are substantial holdings that have the potential to make a difference in CPF members’ retirement adequacy.

It is worth examining our psychological association that the CPF should only be used for housing, health and retirement needs and should be left alone otherwise. There is also the traditional overallocation to property and fixed deposits. Such sentiment compels people to take extremely low, or even no risks.

Meanwhile, we are much less “fearful” with our cash, willing to make big bets on the side to speculate in highly volatile assets like crypto.

Rather than striving to be completely risk-free, aspire instead to assume only appropriate and necessary risk.

Risk isn’t inherently a bad thing - in fact, risk is what gives investors the best chance of returns. It is about taking on a suitable amount of risk and being compensated with the appropriate returns.

If one’s true goal is long-term retirement adequacy, then one must begin from that starting point and look at their total investable assets that build up to the overall asset allocation - not the other way around.

With specific life goals as the blueprint, that is where to begin.