Congratulations - you've become a Singapore Permanent Resident (PR) and you can now enjoy the many benefits that residency comes with. Other than taxation and the right to live and enter Singapore without visa restrictions, one of the greatest benefits is that you’re entitled to participate in Singapore’s pension system CPF. Once you become a PR, you will automatically have CPF accounts - Ordinary Account (OA), Special Account (SA) and MediSave Account (MA) – opened for you.
You can immediately start contributing to your CPF accounts through your monthly salary, but note that new Permanent Residents have lower CPF contribution rates in the first two years:
- Year 1: PRs (aged 55 and below) will contribute 5% of their salary, and employers will contribute 4% of their salary into their CPF accounts
- Year 2: PRs (aged 55 and below) will contribute 15% of their salary, and employers will contribute 8% of their salary into their CPF accounts
This is much lower than the 17% employer contribution rate and 20% employee contribution rate for Singaporeans and PRs who are in the 3rd year and beyond.
Here are a few reasons why you should consider topping-up your CPF accounts on your own as a new PR to grow your retirement nest egg:
1) First $20,000 CPF balances attract 1% more in interest
The Singapore government pays interest of 2.5% per annum (p.a.) on OA balances, 4.0% p.a. on SA balances, and 4.0% p.a. on MA balances.In addition, the government also pays an additional of 1% interest on the first $60,000 of a CPF member’s combined balances, of which up to $20,000 can come from your OA.
By making periodic top-ups to your CPF account, you can benefit from the additional 1% of interest, which will compound and help you grow your wealth over the long-term.
2) Earn interest returns guaranteed by the Singapore government
The interest paid out by CPF is guaranteed by the Singapore government, one of the few remaining AAA-rated sovereigns in the world. It’s practically risk-free returns, although you are still subject to Singapore government credit risk.
CPF reviews the interest rates quarterly - OA monies earn the higher of the legislated minimum of 2.5% p.a or the 3-month average of major local banks’ interest rates, SA & MA monies earn the higher of the legislated minimum of 4% p.a or the 12-month average yield of the 10-year Singapore Government Securities (10YSGS).
3) Tax savings - Reduce income tax by maxing out CPF Medisave contributions
The CPF annual contribution limit currently stands at $37,400, which means if your CPF compulsory contributions haven’t reached this cap, you can make voluntary contributions to your MA account for additional tax relief. You can choose to contribute voluntarily either to all three of your CPF Accounts (OA, SA & MA - distribution is based on current allocation rates of your age group) or only to your MA. Only MA contributions are tax-deductible, whilst Voluntary Contributions to all three – OA, SA and MA – are not tax-deductible.
4) More tax savings - Topping up Special or Retirement Accounts for yourself and your family
Apart from making Voluntary Contributions, you can also utilise the Retirement Sum Topping Up (RSTU) scheme for additional tax relief. This was implemented by the government to encourage Singaporeans and PRs to set aside more funds for retirement needs either in their own CPF accounts or those of family members.
You can choose to top up your Special Account (if you’re below the age of 55), or your Retirement Account (if you’re above the age of 55) either via CPF transfer or cash. You can also top-up CPF Special/Retirement accounts of your family members (parents or parents-in-law, grandparents or grandparents-in-law, spouse, siblings). Only cash top-ups are tax-deductible,
By topping-up your CPF accounts (or your family member’s) via the RSTU scheme, you stand to enjoy a dollar-for-dollar tax relief of up to $7,000 per year for yourself, and another $7,000 per year for your family member. This means you earn the base interest that CPF pays you, plus the additional 1% p.a in interest on the first $60,000 of combined balances, and receive up to $14,000 in tax relief on your personal income.
There are limits to cash top-up amounts: you can top up your SA up to the Full Retirement Sum (FRS). As at 2019, the FRS is $176,000. Once you turn 55, you will be able to make RSTU top-ups to your Retirement Account (RA) up to the Enhanced Retirement Sum (ERS).
Please see here for more details on the caps for cash top-ups that are eligible for tax relief.
Contributions to CPF are irreversible, and your funds are tied up for the long-term
Before you make additional contributions to your CPF accounts, it’s important to note that any funds will be locked up for the long-term. CPF contributions are irreversible and you cannot withdraw and use these funds if you have liquidity needs, such as medical emergencies or if you were retrenched.