Monday, 16 October 2017

10 CPF hacks to grow your nest egg; Choosing the right CPF Life plan

By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 15 Oct 2017

It is never too early to start preparing for retirement - think of it as a lifelong journey, one that in Singapore is inevitably linked to our Central Provident Fund (CPF) savings.

Whether you're starting work, about to buy a home, raising a family or nearing retirement, small steps like CPF transfers and cash top-ups can help build up your nest egg and secure a desired future lifestyle.

The CPF Board has been organising the CPF Retirement Planning Roadshow series in the past few years to raise awareness on how the system helps retirement planning.

Last year, more than 80,000 CPF members visited the five roadshows held islandwide.

The first one this year kicked off in August at the Toa Payoh HDB Hub and featured a wide range of interactive exhibits, including an augmented reality experience booth.

Not to be left out, young CPF members are encouraged to try out a mobile game app called Ready, Get Set, Grow. The app encourages them to take action today via CPF-related messages based on the three basic needs of retirement - housing, healthcare and income.

The Sunday Times highlights 10 hacks to "game" the CPF system.

HACK #1

USING THE CPF VOLUNTARY CONTRIBUTION SCHEME TO TOP UP YOUR CPF SPECIAL ACCOUNT

Let's assume you have maxed out your CPF savings by topping up to the current Full Retirement Sum (FRS) of $166,000 in your Special Account (if you are under 55) or the Enhanced Retirement Sum (ERS) of $249,000 in your Retirement Account (if you are 55 and above).

To enjoy the attractive risk-free CPF interest rates, you can consider the CPF voluntary contribution (VC) scheme - the "VC-3A" scheme - to top up monies to your three CPF accounts (Ordinary, Special and Medisave Accounts) subject to an annual limit known as the CPF Annual Limit. This annual limit takes into account both mandatory and voluntary contributions.

The maximum amount of voluntary contribution to the three CPF accounts that you can make this year is the difference between the CPF Annual Limit ($37,740) and the amount of mandatory contribution received for the year.

Mandatory contribution made by employers takes precedence over voluntary contribution when determining any excess made above the CPF Annual Limit. The excess contribution above the CPF Annual Limit will be refunded without interest from your voluntary contribution payment.

If you have ongoing mandatory contributions for the rest of the year, you would need to take this into account and take note of the total mandatory amount that you would receive for the year, when computing the amount of voluntary contribution you can make. The voluntary contribution to the three CPF accounts is non-tax deductible.

Use the Voluntary Allocation Contribution Calculator on the CPF Board's website to find out how much is allocated to each of the three CPF accounts.

Any Medisave contributions in excess of the member's Basic Healthcare Sum (BHS) will be transferred to the Special Account for members below 55 if they do not have the Full Retirement Sum, and to the Retirement Account for members 55 and above. Otherwise, the excess CPF contribution will be transferred to the Ordinary Account.

The BHS is the estimated savings that you need for your basic subsidised healthcare needs in old age. The prevailing BHS is $52,000 from the start of this year for all CPF members who are 65 years old and below this year.


HACK #2

MAKING USE OF CPF VOLUNTARY CONTRIBUTION SCHEME TO GROW YOUR ORDINARY ACCOUNT SAVINGS

If you have just started working, your CPF mandatory contributions are unlikely to hit the CPF Annual Limit.

You can consider making as many voluntary contributions as possible to grow your three CPF accounts which include your Ordinary Account savings, with compounding interest.

By the time you need it for housing, you will have more Ordinary Account savings and so will not need as big a mortgage.


HACK #3

TOPPING UP TO YOUR ERS TO MAXIMISE INTEREST AND GET HIGHER PAYOUTS

When you turn 55, CPF savings from your Special Account and Ordinary Account up to the prevailing FRS will be swept to your Retirement Account (RA) to form the Retirement Sum.

If you want to get higher payouts, why not quickly top up to ERS - with either CPF savings or cash - to maximise the interest once you turn 55. This will result in higher payouts later as the compounding would have started earlier.

If you have sufficient money in your Special Account, you could leave it there to earn the CPF interest rate, instead of using your Special Account savings to top up your RA to the prevailing ERS.

Take the opportunity to inject cash by topping up to the prevailing ERS in your RA to maximise the interest and get higher payouts when you reach your payout eligibility age.

The prevailing ERS is $249,000. Assuming you are now 55, with this amount in your RA, you will get a monthly payout of $1,860 to $2,000 under the national annuity scheme CPF Life. And you can continue to top up to the prevailing ERS of subsequent years to get higher monthly payouts later.


HACK #4

TOPPING UP PARENTS' CPF ACCOUNTS AND GETTING TAX RELIEFS

If you are giving your parents cash, why not channel the cash to their CPF accounts via top-ups? Not only do you get tax relief of up to $7,000, they stand to earn attractive risk-free CPF interest too. Do note that there is no tax relief for top-ups beyond the prevailing FRS, and tax relief is capped at the $80,000 personal income tax relief cap.

CPF savings in the Ordinary Account earn guaranteed interest rates of 2.5 per cent a year, while savings in the Special Account, Medisave Account and Retirement Account earn 4 per cent.

The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account, earns an extra 1 per cent interest a year. And from last year, an additional 1 per cent interest is paid on the first $30,000 of combined CPF balances for all members aged 55 and above.





HACK #5

TOPPING UP YOUR SPOUSE'S CPF ACCOUNTS TO ENHANCE FUTURE FINANCIAL SECURITY

You can perform a cash or CPF top-up to your spouse subject to conditions. It benefits non-working spouses who have low CPF balances. Only cash top-ups qualify for tax relief.

Before the changes on Jan 1 last year, only CPF savings above your FRS could be transferred to your spouse. There is now a lower threshold so members can transfer their net CPF money after setting aside the BRS in their own CPF accounts to top up their spouse's CPF account up to the ERS.

Both will benefit from the extra interest that will be paid in the respective accounts and there is peace of mind as the spouse will have his or her own source of retirement payouts.


HACK #6

DOING CPF TOP-UPS IN JANUARY TO BENEFIT FROM EARNING INTEREST EARLIER

If you already intend to top up every year, why not do it in January instead of December? This is because CPF members can earn more interest by topping up earlier in the year. So don't procrastinate.

Let's assume you regularly top up your Special Account by $2,000 a year for 10 years, a total sum of $20,000. If you had performed the top-up in January, the total interest earned (4 per cent per year) over 20 years of $16,800 is higher than the $15,500 interest from topping up in December.


HACK #7

DOING CPF TOP-UPS IN SMALL BITE SIZES

Topping up does not have to be one lump sum. You can still make small but regular top-ups. Through Giro, you can consider allocating a small amount from your monthly salary to your CPF account.

For example, you need not add $7,000 to your Special Account or Retirement Account at one time.

Use Giro and split it into 12 payments over a year and avoid the year-end rush.


HACK #8

ENSURING THERE IS AT LEAST $60,000 SAVINGS IN YOUR ORDINARY AND SPECIAL ACCOUNTS

Even if you are using your Ordinary Account for housing, make sure your Ordinary Account and Special Account savings add up to at least $60,000 to maximise earning the extra 1 per cent interest.

CPF members 55 and above enjoy an additional 1 per cent interest (up to 6 per cent) for the first $30,000 of their combined CPF balances, so the gains are even higher.


HACK #9

MAXIMISING YOUR CHILD'S CHILD DEVELOPMENT ACCOUNT (CDA)

Financial experts say it is prudent to maximise your child's CDA - which earns an interest of 2 per cent a year - as unused CDA savings will eventually be channelled to their CPF Ordinary Account.

This is how it works: Unused CDA savings will be transferred to a Post-Secondary Education Account (PSEA), and unused PSEA savings will be transferred to your child's Ordinary Account (OA).

"These OA savings give your child the head start in growing their CPF savings and can be used to finance your child's first home," said the CPF Board.

The CDA is part of the Government's Baby Bonus scheme. Children born from March 24 last year will receive an upfront grant of $3,000. The Government will match any savings made to your child's CDA on a dollar-for-dollar basis.

Money in the CDA can be rolled over to your child's PSEA when he or she turns 13. Funds that are not used by December of the year that the child turns 12 will get transferred to the PSEA.

The PSEA money also earns an interest of 2.5 per cent. At age 30, those funds will go into the CPF Ordinary Account, which earns an interest rate of up to 3.5 per cent.


HACK #10

TOPPING UP YOUR CHILD'S SPECIAL ACCOUNT

If your retirement needs are well catered for, and you have plenty of surplus cash or just won the lottery, you can consider topping up your child's Special Account to leverage attractive interest rates and compounding.

Assuming the child has zero Special Account balance, the top-up is subject to a cap of $166,000 for this year. Assuming an annual interest rate of 4 per cent, the amount will grow to $1.5 million over 55 years.

Of course, this is assuming there is no change in CPF policies and interest rates.

There is no tax relief for top-ups to your child's CPF accounts.

This is the first of a two-part series on retirement planning with a focus on Central Provident Fund savings.










Is the new CPF Life plan ideal for you?
This is the second of a two-part series on retirement planning with a focus on Central Provident Fund savings
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 22 Oct 2017

With lifelong payouts from the national annuity scheme Central Provident Fund (CPF) Life, we need not worry about outliving our savings. A new CPF Life option - the Escalating Plan - will be available from Jan 1. This plan will be in addition to the CPF Life Standard Plan and Basic Plan. All CPF Life members can switch to the CPF Life Escalating Plan between January and December next year.

With the three plans, members can choose the desired amount of monthly payout they want to receive in their golden years. Of course, this is dependent on your savings in the Retirement Account, which would be used as premiums to buy the CPF Life annuity.

As part of a recent World Economic Forum Retirement Investment Systems Reform project, Singapore's CPF Life scheme was profiled together with different case studies from various countries.

The report highlighted that with CPF's interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

"This compares favourably with life annuities in most markets," stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65.

It is no wonder that financial experts like Mr Christopher Tan, chief executive of Providend, believes that every retiree's portfolio must include an annuity plan to hedge against longevity risk.

He says: "CPF Life is currently the best annuity plan in the market. It is low-cost and offers high return."

Do check out the user-friendly CPF Life Payout Estimator tool on the CPF Board's website, to estimate your CPF Life payouts and bequests.

The Sunday Times highlights what you need to know about the CPF Life Escalating plan.


Q WHAT ARE THE THREE CPF LIFE PLANS?

A In a nutshell, the CPF Life Standard Plan offers higher monthly payouts while the Basic plan has lower payouts but allows a member to leave a larger bequest or inheritance to loved ones.

The Standard Plan is the default plan for CPF members who do not choose a plan when enrolled into CPF Life.

The new Escalating Plan is designed for those with concerns over the rising cost of living and want their payouts to hedge against inflation.


Unlike the Standard and Basic plans, which offer monthly payouts that are level throughout a member's life, the Escalating Plan's payouts will increase at a fixed annual rate of 2 per cent, in return for a lower initial payout.

However, the total payout amount eventually exceeds the level payout amount of a Standard CPF Life in later years due to the annual increments.

Mr Brandon Lam, Singapore head of financial planning group at DBS Bank, says: "As members age, inflation may erode the purchasing power of their payouts. This increment helps mitigate the impact of inflation.

"For members under the CPF Life Standard Plan, having a fixed payout in later years may not be able to provide the same quality of lifestyle of their earlier years if they are fully dependent on CPF Life payout."


Q WILL EXISTING CPF LIFE MEMBERS BE ALLOWED TO SWITCH TO THE NEW CPF LIFE ESCALATING PLAN?

A All CPF Life members can choose to switch to the Escalating Plan between January and December 2018.

These include members who had switched to the CPF Life Standard Plan in 2013 when the earlier four CPF Life plans introduced in 2009 were reduced to two. Note that if you are already receiving payouts under CPF Life and you need to switch to the new Escalating Plan, your new payout may be reduced by 20 per cent or more from your current payout.

This is because, for the same annuity premium and other factors being equal, a CPF Life plan with payouts that increase over time will have starting payouts that are lower compared to a CPF Life plan with level payouts that do not increase over time. This is based on independent and objective actuarial calculations, said the CPF Board.


Q HOW MUCH PREMIUM DO MEMBERS NEED TO PAY UNDER THE CPF LIFE ESCALATING PLAN?

A Under the Escalating Plan, all the Retirement Account (RA) savings will be deducted as annuity premium and paid into the Lifelong Income Fund, which will provide a member with a monthly payout from the start age for as long as he or she lives.


Q WHY IS THE INITIAL PAYOUT UNDER THE CPF LIFE ESCALATING PLAN PAYOUT SO MUCH LOWER?

A For the same annuity premium and same payout start age, a CPF Life plan with payouts that increase over time would necessarily have starting payouts that are lower compared to a CPF Life plan with level payouts that do not increase over time.

To receive a higher starting payout under the CPF Life Escalating Plan, members can top up their CPF Life premiums and/or delay their payout start age, up to age 70.

Starting later allows you to enjoy permanently payouts of up to 7 per cent higher for every year deferred. The option to delay payouts (up to age 70) until you need them is useful, especially for people still employed.

After all, 40 per cent of Singaporean residents aged 65 to 70 continue to receive work income. Thus, they may not need their CPF Life payouts at, say, age 65.


Q HOW LONG DOES IT TAKE FOR MY PAYOUT UNDER THE CPF LIFE ESCALATING PLAN TO REACH THE SAME PAYOUT LEVEL AS THE CPF LIFE BASIC AND STANDARD PLANS?

A For a male member who has an RA balance of $166,000 at the age of 55, and starts his payouts at age 65, the CPF Life Escalating Plan payout takes about nine years to reach the same payout level as the Basic Plan. It takes about 13 years to reach the same payout level as the Standard Plan.

For a female member who has the same RA balance at 55, and starts her payouts at 65, the Escalating Plan payout takes about 11 years to reach the same payout level as the Basic Plan. It takes about 14 years to reach the same payout level as the Standard Plan.

Beyond this period, both members will receive higher monthly payouts for the rest of their lives as their payouts continue to escalate annually.

After about 22 years, the monthly payout under the Escalating Plan for both the male and female members will be about 20 per cent higher than the payout under the level Standard Plan.


Q HOW LONG DOES IT TAKE FOR THE TOTAL PAYOUTS RECEIVED UNDER THE CPF LIFE ESCALATING PLAN TO BREAK EVEN WITH THOSE OF THE STANDARD PLAN?

A It will take a member about 25 years under the Escalating Plan to receive the same amount of cumulative payouts compared to the Standard Plan.

However, since the payout in the initial years is lower under the CPF Life Escalating Plan, the corresponding bequest (left for beneficiaries) during this period is higher.


Q WHAT ARE THE FACTORS THAT MEMBERS SHOULD CONSIDER WHEN DECIDING WHICH CPF LIFE PLAN TO CHOOSE?

A Providend's Mr Tan advises that the first question members should ask is: Would you like your CPF payouts to be hedged against the rising cost of living?

"Although this sounds like a rhetorical question, the truth is, there are members who may want a flat payout and have other ways to hedge against inflation," he says.

If the answer is a "yes", Mr Tan says members would then have to ask if they can accept a 20 per cent lower initial payout than the current Standard Plan. If they can't, maybe because they really do need the higher income for their retirement, they would have two options.

"Option 1: They can defer their drawdown from age 65 to a later age, say maybe age 69, so that the starting payouts can be the same as the Standard Plan," he adds.

"Option 2: They can top up their RA, perhaps by another $40,000 to $50,000, so that the starting payouts can be the same as the Standard Plan."

If both options are not possible, members might want to choose either the Basic or Standard plan for higher payouts that would meet their needs, Mr Tan notes.

Ms Chung Shaw Bee, head of deposits and wealth management for Singapore and the region at UOB, suggests taking a look at your overall financial portfolio and determining how much cash savings and investments you hold, and how much of your nest egg you expect to have built when you retire.

"This will enable you to evaluate and to decide on a CPF Life plan that meets your retirement needs," she says.

"For example, if you think that your financial plan is sufficient for you at the point of retirement and meets your lifestyle needs, you may prefer to choose an escalating payout model to ensure a continued cash flow as you grow older."

Other factors to consider include whether a member would be gainfully employed beyond retirement age and if he or she has alternative sources of income like property rents, or is supported by their children, says Mr Lam.

"Members who prefer to maintain their quality of lifestyle throughout their retirement years should consider the Escalating Plan as inflation can erode their purchasing power. The effect will be especially pronounced during their later years," suggests Mr Lam.

Mr Alfred Chia, chief executive of SingCapital, recommends the Basic Plan for CPF members turning age 65 in the next 10 years and who have beneficiaries for whom they want to provide.

"However, if the member is single/widowed and does not have beneficiaries that he needs to take care of, I will recommend the Standard or Escalating plan," Mr Chia says.

Mr Lam advises that while the CPF is an integral part of retirement planning, Singaporeans should pro-actively plan for other sources of retirement income to achieve their dream retirement lifestyle.





Q WHAT ARE THE CPF INTEREST RATES?

A CPF supports your three basic needs of housing, healthcare and retirement income.

It comes with attractive risk-free interest rates of up to 5 per cent a year when you're below 55 years old, and up to 6 per cent when you're 55 and above.

This is how they are structured: CPF savings in the Ordinary Account earn guaranteed interest rates of 2.5 per cent a year, while savings in the Special Account, Medisave Account and RA earn 4 per cent.

The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account, earns an extra 1 per cent interest a year.

And from last year, an additional 1 per cent interest is paid on the first $30,000 of combined CPF balances for all members aged 55 and above.


Q HOW IS CPF ABLE TO PROVIDE RISK-FREE INTEREST RATES OF UP TO 6 PER CENT A YEAR?

A The CPF Board invests members' funds, including CPF Life money, in Special Singapore Government Securities (SSGS), which are guaranteed. Proceeds from SSGS issuance are pooled and invested with the rest of the Singapore Government's funds. Singapore's strong government balance sheet, with a substantial buffer of net assets, enables it to withstand market cycles and meet its guaranteed liabilities, including its SSGS commitments.

This means that CPF members bear no investment risk, regardless of financial market conditions. Interest rates on SSGS match those of CPF savings, with members receiving the annual interest rates promised of up to 6 per cent a year.




Experts' choice of CPF Life plan
The Sunday Times asks financial experts which CPF Life plan they would choose.


MR ALFRED CHIA, CHIEF EXECUTIVE OF SINGCAPITAL

"I will personally choose the Basic Plan as I have a spouse and children. I would like to leave some cash for them and their children as my unconditional love.

"More importantly, I would like to provide for my spouse as females tend to live longer than males."



MR BRANDON LAM, SINGAPORE HEAD OF FINANCIAL PLANNING GROUP AT DBS BANK

"I will probably opt for the Standard Plan and receive the higher payout earlier. I can then have the flexibility to see if I need to spend the money or reinvest."



MR CHRISTOPHER TAN, CHIEF EXECUTIVE OF PROVIDEND

"Personally, I will choose the Basic Plan. From the mathematical point of view, the Basic Plan makes the most sense to me.

"For a difference of about $100 or more per month between the Standard and Basic plans, the bequest for the Basic Plan is a lot higher than the Standard or Escalating plan.

"The $100 or more per month difference will also not make a big difference to my retirement lifestyle as I have other investment options for my retirement and these investment plans will also take care of the rising cost of living and as such, I do not need the Escalating Plan."






















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