Your parents have worked hard all their lives, and are now looking forward to the next chapter of their lives as they reach retirement age. The distribution of CPF monies across different CPF accounts may be an important determinant of how their retirement lifestyle will be. As such, it is important that you are able to advise them on how to manage their CPF accounts. Here are 4 things both you and your elderly parents should know:
1. Understanding how CPF forms our retirement plan
While CPF is one of the best pension schemes globally, it can be confusing due to the numerous policies involved and extensive changes the scheme has undertaken over the years.
At its heart, the CPF scheme is meant to provide financial security for Singaporeans and Singapore Permanent Residents (PRs) when they retire. It also provides flexibility to use some of the funds for your housing, education, insurance and medical needs.
Understanding the CPF scheme and CPF LIFE:
Throughout your working life, you contribute a portion of your salary towards your Ordinary Account (OA) and Special Account (SA). You earn a risk-free return of between 2.5% (for your OA balances) and 4.0% (for your SA balances). You also get tax-relief for these mandatory contributions, as well as any voluntary contributions.
You enjoy certain flexibility with your OA, as you can use your OA balances to purchase a home, education, insurance policies, and invest. You enjoy less flexibility with your SA, but you may still invest a portion of it.
Once you turn 55, you get to withdraw a portion of your savings. You can withdraw a sum of $5,000 regardless of your balances. If you have more than the Full Retirement Sum (FRS), you can also choose to withdraw any sum in excess of it. The bulk of it goes into your newly created Retirement Account (RA), compounding at between 4.0% and 6.0% for another 10 years, before you are able to join CPF LIFE and start receiving a lifelong monthly payout each month.
At 65, you can choose to enter CPF LIFE, Singapore's life annuity scheme. This gives you the assurance of receiving a lifelong monthly payout, regardless of how long you live. The payout amount makes it the best retirement plan that you can get relative to other private insurance annuity plans.
By understanding this process as well as possible, you can help your parents (and yourself) better plan for retirement.
2. Appreciating the intricacies of CPF Lifelong Income For The Elderly (CPF LIFE)
As Singapore's life annuity scheme, CPF LIFE provides Singaporeans and PRs with the assurance that they will never run out of funds in their retirement. Digging deeper into the CPF LIFE annuity scheme, there are three main things that you need to know:
a) Your retirement sum
As mentioned above, when you turn 55, the bulk of your CPF savings will be transferred into your RA. At this point, you can choose to save either the Basic Retirement Sum (BRS), Full Retirement Sum (FRS) or the Enhanced Retirement Sum (ERS).
The actual amount for each retirement sum changes each year, to keep up with inflation and rising costs of living. More information are available on the CPF website:
Retirement sums and the monthly payouts at 65 in 2020 (updated)
BRS: $90,500 - $750 to $810 monthly
FRS: $181,000 - $1,390 to $1,490 monthly
ERS: $271,500 - $2,030 to $2,180 monthly
The default plan is to be on the FRS. This means you can only withdraw CPF OA and SA balances in excess of $181,000. If you own a property, you can choose to pledge it, and save only up to the BRS or half the FRS. If you have excess funds, you can also choose to keep it in your RA to receive more when you enter CPF LIFE.
b) Your CPF LIFE plan
At the Payout Eligibility Age (PEA), which is currently set at 65, you will have to choose the CPF LIFE plan that you wish to be on. Again, there are three plans to choose from: Basic Plan, Standard Plan and Escalating Plan.
The Standard Plan is the default option, providing you with monthly payouts each month. You can choose to go on the Basic Plan, which will provide lower monthly payouts each month, but enables you to leave more in a bequest to your loved ones. You can also choose the Escalating Plan to start your payouts at a lower base and receive gradually increasing payouts to cater to future inflation and rising standards of living.
c) Deferring your payouts
As Singaporeans are living longer and working longer, there may be a significant group of people still gainfully employed at 65. If your parents are still employed, they can choose to defer entering the CPF LIFE scheme until they finally retire or hit the age cap of 70.
Doing this will enable them to receive around 7% more in monthly payouts when they really need it, rather than receiving it earlier than needed.
3. Growing our CPF nest egg
Your parents' CPF nest egg will eventually translate into the lifelong monthly payouts from the CPF LIFE annuity scheme. Hence, building an adequate, or larger nest egg, can provide greater comfort and security in retirement.
The main way to accumulate CPF savings is via contributions from your salary while you are working. However, there are also other ways you can build a larger CPF nest egg.
a) Retirement Sum Topping-Up Scheme
Through the CPF Retirement Sum Topping-Up Scheme (RSTU), you or your parents are able to top up their Special Accounts (below age 55) or Retirement Accounts (age 55 and above) via a CPF transfer from your own CPF savings or a cash top-up.
Do note that the top-up monies are set aside for their retirement needs (via CPF LIFE) and cannot be withdrawn in cash after 55 or used for any other purposes such as education, investment or housing.
Before transferring your CPF savings to your parents, your CPF balance has to exceed the Basic Retirement Sum (BRS). This is to ensure that you have sufficient CPF savings for yourself in the future. It is also important to note that top-ups under the RSTU scheme are irreversible and irrevocable.
b) Voluntary contributions
If your parents CPF contributions have not hit the Annual Limit of $37,740, you or your parents can make voluntary contributions up to this amount.
One thing you should note is that retirement security is not just about retirement income via the CPF LIFE monthly payouts, but should also take care of medical needs. Under this scheme, contributions to MediSave Accounts are encouraged as they are tax-deductible for the recipients. Voluntary contributions to all three CPF accounts will be non-tax deductible.
c) Transferring from OA to SA
Another way your parents can increase their retirement security is by transferring unused OA balances to their SA or RA. This will instantly earn them a minimum additional interest of 1.5% return per year.
Compounded over a long time, this can make a significant difference to your parents' CPF LIFE monthly payouts.
d) Leaving your funds with CPF
Singaporeans and PRs can withdraw a lump sum of $5,000 from their CPF accounts at 55, and 20% of their RA balances (inclusive of the initial $5,000) once they are 65, regardless of how much CPF savings they have.
Your parents can build a larger retirement nest egg by passing over short-term lump sum withdrawals to let the funds continue compounding and/or contributing to their CPF LIFE monthly payouts, which will last a lifetime.
4. Making a CPF nomination
CPF is not covered under your or your parents' will. This means that if your parents have not made a CPF nomination, their CPF savings will be transferred to the Public Trustee's Office for distribution to your family members under the Intestacy Law or Certificate of Inheritance (for Muslims). There will be fees charged for dealing with CPF monies.
If your parents want to distribute their CPF funds on their own terms, they should make the appropriate nominations.
Concluding thoughts - Is CPF LIFE enough for retirement?
There are clear benefits of CPF and the CPF LIFE scheme in providing for your parents' retirement security. However, this should only form the foundation for their retirement needs. A quick check on the CPF LIFE estimator shows that having the FRS of $181,000 in 2020 only provides a lifelong monthly income of between $1,390 and $1,490.
At the lower end, this is barely above the Minimum Income Standard (MIS) of $1,379 a month, that the Lee Kuan Yew School of Public Policy stated is required for elderly Singaporeans to meet their basic needs.