Living in Singapore, many of you should be familiar with the Central Provident Fund (CPF). Akin to a “forced savings” scheme, the CPF is a mandatory social security system that enables working Singapore Citizens and Permanent Residents (PRs) to set aside funds primarily for their retirement, as well as for their healthcare, homeownership, family protection, and asset enhancement.
The CPF is made up of three accounts:
- Ordinary Account (OA) – for housing, investment, insurance and education
- Special Account (SA) – for retirement and investments
- MediSave Account (MA) – for hospitalisation expenses and approved medical insurance
On your 55th birthday, a fourth account, the Retirement Account (RA), will be created for you. When this happens, balances from your OA and SA will be transferred to your RA. At this point, you can also withdraw any balances above your Full Retirement Sum (FRS), which is $176,000 in 2019.
Changes in the CPF allocation rates as you grow older
As you grow older, your CPF contribution and allocation rates change. One main reason for this change is to help you transition into the next life stage.
35 years old and below
For the first 10 to 15 years of your career, you will be contributing an equivalent of 37% of your wages (subject to a salary cap of $6000 - i.e. the first $6,000 of your monthly salary is subject to CPF contributions) to your CPF monthly. Both employers and employees have a responsibility to contribute to social security funds in Singapore, with 20% coming from your salary and 17% contributed by employers.
At this stage of your life, the bulk of your CPF contributions are channelled into your OA. This is to help fund your current or future home, as you can use your OA balances to pay for the downpayment and monthly mortgage of your property.
When planning for your home purchase, you should not stretch your finances such that you have to use all of your OA contributions each month to afford your home. This is because, as depicted in the table above, your OA contributions start to drop from a maximum of 23% of your salary after 35. This means as allocations shift from your OA towards your SA and MA, you may have to make up for shortfalls with cash payments.
At the same time, you are already stashing away savings for your long-term retirement in your SA (6%) and your medical needs in your MA (8%).
Above 35 to 50
There is a gradual shift in your allocation rate, with less being funnelled into your OA, and more into your SA and MA. The reason for this is simple, while you may still have a home mortgage to pay off, you also need to start paying attention to your retirement and medical needs.
As the 4.0% per annum (p.a.) you earn on your SA and MA balances is higher than the 2.5% p.a. you get on your OA balances, you are better preparing for your retirement and safeguarding your medical needs.
Above 50 to 55
Between 50 and 55, you contribute more towards your SA than your MA. This does not happen in any other period of your working life, and underlines the government’s view of how important it is to focus on your retirement nest egg in this age group.
This rule is not entirely surprising as you have to set aside the Full Retirement Sum (FRS) in your Retirement Account (RA) at 55, before being allowed to withdraw any excess sums.
In addition, since your OA savings can only earn interest of 2.5% p.a., you can choose to follow the government’s lead by transferring some funds from your OA balances to SA in order to optimise your CPF savings. However, it is important to note that these transfers are irreversible.
If you have more than the FRS in your OA and SA balances, it may make sense to make these transfers during this age period to increase your interest returns, before you’re able to withdraw funds in excess of your FRS at 55.
Above 55 to 60
When you hit 55, your CPF contributions will drop to 26%, with employers contributing 13% (down from 17%) and employees contributing 13% (down from 20%). Before this, while your allocation rates may have changed, the overall contribution rate remained at 37% of your salary, with employers and employees contributing 17% and 20% respectively.
With the decrease in employer contribution, older employees will become less expensive and remain competitive in the workforce. If they are valuable resources in their companies, they still retain the flexibility to negotiate better remuneration packages to compensate for the shortfall.
The decrease in both employer and employee contributions could also be due to the fact that a retirement sum has been set aside in your RA to safeguard a monthly payout in retirement. This means you can afford to contribute less to your SA.
Above 60 to 65
When you hit 60, your CPF contributions drop to 16.5% from 26%, with employers contributing 9% and employees contributing 7.5%. This continues to make older workers less expensive compared to younger employees.
During this age group, allocation to your OA drops significantly to 3.5% from 12%. This is an important factor in planning your home mortgage repayments, as it can leave you without enough OA contributions each month.
While your allocation rates to your OA and SA are at 3.5% and 2.5% respectively, your MA contributions remain at 10.5%. Planning for your medical needs becomes even more important as you age.
There is a further drop in your CPF contributions to 12.5%, where 7.5% will be contributed by your employer and 5% contributed by yourself.
In addition, only 1% will go towards your OA and SA respectively. Your MA continues to receive 10.5% of your contributions.
What you can do with your CPF
Besides paying for your housing, retirement, insurance and medical needs, you can also invest your CPF OA and SA balances, in order to earn a higher return than the guaranteed interest rates.
- Here are 6 strategies to maximise your CPF account (Endowus Insights)
- What you need to know before investing your CPF (Endowus Insights)