If the current COVID-19 climate has made you worry about your employment status and income source, you're not alone. Many people have considered freelancing – be it side-hustles or even starting mini-businesses – to stay afloat. To thrive as a self-employed individual in Singapore, it is crucial to understand the CPF contribution schemes available to those in the gig economy and how they can help you. In this article, we will cover the following:

  1. The 2 CPF contribution schemes specific to the self-employed
  2. Why you should make CPF contributions
  3. Why you shouldn’t make CPF contributions

The 2 CPF contribution schemes specific to the self-employed

  1. Mandatory contributions into your MediSave Account (MA)
  2. Voluntary CPF contributions

Mandatory MediSave Contributions

The Government mandates that all self-employed personnel have to contribute to their MediSave Account as long as they earn more than $6,000 in Net Trade Income (NTI) for the year. For many self-employed people, this means they will have to contribute as much as their employed peers.

Table 1: MediSave contribution percentage across age group, based on Net Trade Income. More information on phased in rates can be found here.

For example, if you are 30 years old and your net trade income is $60,000, then your CPF MA mandatory contribution will be $60,000 *8% = $4,800. If you are 45 years old, and your net trade income is $70,000, then your CPF MA mandatory contribution will be $70,000 *10% = $7,000.

The principle behind this policy is that if you were to make a reasonable salary ($18,000 per annum, or $1,500 a month), you will have to contribute as much into your own MediSave as your peers who are employees, so that you squirrel away a sum of money for your own Integrated Shield Plan Premiums and any healthcare costs that you may incur.

Voluntary CPF Contributions

Any Voluntary CPF contributions made to CPF by the self-employed have to be allocated across all 3 CPF accounts, namely CPF Ordinary Account (OA), Special Account (SA) and MA. The allocation ratios are the same as for employed CPF members.

Source: CPF (Accurate as of 8 July 2020) 

For instance, if you are a 25-year-old self-employed person and you choose to top up $10,000 through voluntary CPF contributions, you will have ~$6,217, ~$1,621 and ~$2,160 in your CPF OA, SA and MA respectively.

Similarly, if an employed person is earning $27,027 in gross salary, which leads to his and his employer’s CPF contribution being $10,000 in total (37% of $27,027), then his CPF contribution will be the same as the self-employed person at ~$6,217, ~$1,621 and ~$2,160 into your CPF OA, SA and MA respectively.

Now, let us move on to why the self-employed should or should not do a voluntary contribution.

Why should the self-employed do a Voluntary Contribution to their CPF?

1. You get to save on taxes

You can get tax relief based on the MediSave and voluntary CPF contributions that you make, but capped at the lower of:

  • 37% of your net trade income assessed; or
  • CPF annual limit of $37,740; or
  • The actual amount contributed by you.

Assuming that you are making a salary of $102,000 in net trade income in the year of assessment, assuming no tax reliefs on this amount, you will be paying around $5,880 in taxes. However, if you were to contribute the maximum CPF voluntary amount, which is 37%*$102,000 = $37,740, then your taxable income will be reduced to $64,260 and you will be paying around $2,248 in taxes, less than half of what you would have paid if you did not do any CPF contributions. One way to look at the tax savings is that you save $3,632 for the $37,740 contribution, saving you 9.6% with the CPF contribution. That is on top of the other benefits stated below.

2. You can get higher interest rates on the CPF monies compared to bank rates.

The monies in CPF yield an attractive interest rate relative to bank interest rates. Also, for the first $60,000 in your CPF monies (with up to $20,000 from the OA), you will get an additional 1% interest for your CPF monies. That means you get 3.5% to 5% interest, compared to as low as 0.05% interest in bank accounts.

3. You will use the monies for housing, retirement, medical or investment purposes anyway.

Most self-employed people have the same housing, retirement and medical needs as their employed peers – wanting to own a house, save up for retirement, and pay for their Integrated Shield Plan Premiums. It should not matter whether they do it with cash, or with CPF monies.

From that perspective, it makes more sense to do a voluntary contribution into your own CPF since the monies can be used for housing, retirement, medical and investment purposes regardless. You even get to enjoy tax relief and higher interest rates in the process! As the monies contributed is on a voluntary basis, the self-employed CPF member can have full control of the amount contributed.

4. Your CPF monies will be safe from debtors.

As a business owner, you may be taking significant personal liability in your work and could be sued for Liquidated Damages. Thankfully, any savings in the CPF are protected from creditors and/or the Official Assignee, regardless of how much you may have been sued for. You will still be able to apply for the withdrawal of your CPF savings as an undischarged bankrupt when you turn 55 or under medical grounds. Putting money into your CPF is a great way to protect your retirement money from the risk of your own business.

Why the self-employed shouldn’t do a Voluntary Contribution

1. You could face liquidity concerns

When you have transferred money into your CPF, you cannot reverse the decision. For CPF OA and SA monies, the earliest you can withdraw it in cash is when you reach 55, and there are certain restrictions tied to it. Any transfer to CPF MA cannot be reversed, you can only use the MediSave funds.

If you plan to contribute to your CPF accounts, be very sure that you are using money that you do not need in the short or mid-term. You may want to make sure that you have your emergency funds in place, and be comfortable with the stability of your income before you commit to putting cash into your CPF.

2. Your ability to capitalise on business opportunities is reduced

Being a business owner and managing your business’ finances may mean that you have opportunities to invest in equipment and working capital to grow your business more. Some of these opportunities may sporadically present itself. If you feel that these opportunities can yield high returns then you may want to reconsider topping up your CPF.

In conclusion...

The volatility of the employment market and economy as a whole may be scary to business owners and the self-employed, but the need to plan for retirement remains. We believe that CPF and CPF LIFE have many benefits such as keeping our money safe and saving on taxes. In these uncertain times, it is more important than ever to take deliberate steps toward our financial planning so that we get the best value for our money.