Put your CPF money to work

Here are some tips on how to maximise the use of your Central Provident Fund savings
By Rachael Boon, The Sunday Times, 4 Jan 2015

Investments should give stable returns

There is no better time than a new year to start your financial journey on the right foot, especially for young working adults just starting out on their careers.

And this being Singapore, one of the most fundamental basics to get your head around is the Central Provident Fund (CPF), the national social security savings plan that helps people save for their housing, health care and retirement.

Citizens and permanent residents working here contribute to their CPF accounts.

Employers are required to make contributions for employees who earn more than $50 a month.

CPF data shows that the average net balances of CPF members have grown at an annual average rate of 7.6 per cent, over the past 10 years - from $34,800 in 2003 to $72,100 in 2013.

The Sunday Times Invest breaks down the CPF to show what it can be used for and gives some tips to maximise it.

Where do monthly contributions go?

Contributions go into three places: the Ordinary Account (OA), the Special Account (SA) and the Medisave Account (MA).

OA funds, which earn a guaranteed interest rate of 2.5 per cent, can be used for housing, investment, education and approved insurance.

The SA and MA earn guaranteed interest rates of 4 per cent.

SA funds are for old age and investing in retirement-related financial products, while the MA funds can be used for hospital expenses and approved medical insurance.

You earn an extra 1 per cent interest for the first $60,000 of your combined CPF balances, of which up to $20,000 can come from the OA.

When you turn 55, money from the Special and Ordinary accounts will be transferred into a newly formed Retirement Account (RA).

This will hold up to $155,000 or whatever the Minimum Sum is for your cohort. Any extra remains in the Special and Ordinary accounts.

CPF contribution and allocation rates

Do you know how much you and your employer are contributing to your CPF each month, and how much goes into each account?

The CPF contribution and allocation rates depend on the citizenship type, your age group and the wages earned.

Contribution rates rose on Jan 1, with the aim of helping people save more for their retirement and health care.

Those aged 35 and below and earning more than or equal to $750 a month will see the employer contribution rate increase from 16 per cent to 17 per cent.

Even though your employer is responsible for making CPF contributions for you every month, it is important for you to check your payslip to ensure the amount is correct.

Employee contribution remains at 20 per cent of the salary.

The MA allocation rate has been increased from 7 per cent to 8 per cent for those 35 and younger.

The allocation rate remains at 23 per cent for the OA and it is 6 per cent for the SA.

A CPF Board spokesman says: "As we grow older, the allocation rates to your MA and SA will increase. With Singaporeans living longer, these additional savings will help to meet our health-care and retirement needs."

You can compute your monthly CPF contribution and the allocation via the online CPF Contribution Calculator at www.cpf.gov.sg/ cpf_info/Online/Contri.asp

What can you use the CPF for and how should you do it?

The CPF Board spokesman says: "While the savings in the CPF are primarily set aside for retirement, the monies can also be used for housing, health care, and even investments.

"As CPF contribution rates decrease over time and the allocation rates change for different age groups, members are advised to plan their finances before committing to any long-term uses of their CPF savings."

Young working adults who have just married or are planning to do so will likely make housing a key priority.

Knowing how much cash and CPF savings you can use for buying a property will give you a more realistic estimate of the financial impact of a home purchase, said the CPF.

OA savings can be used to help finance Housing Board flats or private property here in the areas of making a down payment, paying off a housing loan, stamp duties and legal fees.

The OA savings can also help pay off a loan taken out for building a house or buying vacant land for a home but this is only applicable for private property.

"While CPF savings can be used for the home purchase, there are CPF limits that may apply to the amount of OA savings one can use," says the CPF Board spokesman.

These limits include the valuation limit and the withdrawal limit, which depend on the type of property and housing loan.

The valuation limit is the lower of the purchase price or the market value of the property at the time of purchase.

The withdrawal limit is the maximum amount of OA savings that can be withdrawn and used for the flat. This is capped at 120 per cent of the valuation limit.

After reaching the valuation limit, you can continue to use the OA for housing up to the withdrawal limit, but only if you meet certain conditions.

If you are below 55, for instance, you must have set aside half of the current Minimum Sum in the SA - including the amount that may have been withdrawn for investment - and in the OA, to ensure that funds for retirement are sufficient.

You can also use your OA or SA savings to invest in a range of investment products such as unit trusts and local stocks under the CPF Investment Scheme (CPFIS) but you must be at least 18 years old and not an undischarged bankrupt.

You must have more than $20,000 in the OA for investment under the CPF Investment Scheme-Ordinary Account or more than $40,000 in the Special Account to invest in the CPF Investment Scheme-Special Account.

The CPF Board notes that such investment should ideally provide stable and predictable returns.

Its spokesman says: "In this respect, members should consider investing in well-diversified, low-cost funds, which are less volatile as compared to stocks, in order to lower their risks."

Other ways to maximise your CPF

If you have extra funds, consider making top-ups beyond the mandatory CPF contributions.

This can be done through a lump sum payment or regular contributions by Giro, either through the CPF Minimum Sum Topping-Up Scheme, voluntary contributions or by transferring funds from the OA to the SA.

The scheme allows you to make top-ups to your own SA or your loved ones' SA.

You can enjoy tax relief of up to $14,000 each year if you use cash to top up for yourself and your loved ones - up to $7,000 for each category.

Voluntary contributions are subject to the approved limit and do not qualify for tax deduction. However, voluntary contributions to the MA alone are tax-deductible.

If you transfer savings from the OA to the SA to earn higher interest, note that the transfer is irreversible and you can only transfer an amount up to the prevailing Minimum Sum in your SA.

The CPF Board spokesman says that younger CPF members should consider leaving funds in their CPF accounts to enjoy guaranteed and attractive interest rates.

"With the compound interest rates, the members' CPF savings will also grow steadily and significantly over time."

Planning essential

“While the savings in the CPF are primarily set aside for retirement, the monies can also be used for housing, health care, and even investments. As CPF contribution rates decrease over time and the allocation rates change for different age groups, members are advised to plan their finances before committing to any long-term uses of their CPF savings.”

A CPF Board spokesman

CPF takes care of housing, so couple invest in childcare centre
By Rachael Boon, The Sunday Times, 4 Jan 2015

Sales account manager Lim Si Yun began using her Central Provident Fund (CPF) savings soon after she started work.

Madam Lim, 32, actively invested in unit trusts in her 20s under the CPF Investment Scheme - Ordinary Account (CPFIS-OA).

She says this was before it was necessary to have more than $20,000 in the Ordinary Account (OA) if a CPF member wanted to invest under the scheme.

"For about three years, I put in $14,000 to $15,000 in unit trusts. I've been holding them but the return is not fantastic; I've maybe just broken even."

Madam Lim adds that when she first started working, she knew that she could use her funds in the CPF to "only invest or buy a house".

"When there's additional savings in your CPF, there are limited things you can do with them. When I first started work, I didn't have much commitment so I decided to invest."

She has stopped investing using her CPF savings and is using the funds to pay off her five-room resale Housing Board flat that she bought with her husband in 2009 for $388,000.

The CPF savings helped to pay part of the down payment for the flat.

Madam Lim and her husband, Mr Harry Hoo, 34, are paying for the flat using their CPF savings each month, a sum of $1,200 in total, with $600 from each.

She says she became more familiar with the CPF through financial advisers and when she was going to buy the flat.

"I read up as much as possible, to find out things like how much can be used for the home from CPF and how much cash I needed to fork out."

With CPF taking care of her housing needs, Madam Lim is able to use her extra income in other ways.

"We don't have to fork out additional cash because of the CPF, and as a result we managed to make other investments."

The couple, who have two young children, have invested in a new childcare centre called Jolly Owl Schoolhouse at Woodlands, where they will also enrol their children.

Mr Hoo is involved in setting up the centre, which is expected to be operational by the end of this month.

Madam Lim uses the CPF online portal to check her balances from time to time.

She notes: "The website is quite easy to understand, and in some areas you can click for explanations."