CPF withdrawal at age 55: A matter of interest

'Unbeatable' interest rate offered by CPF, threat of deflation make leaving savings in account prudent
By Goh Eng Yeow, Senior Correspondent, The Sunday Times, 8 Mar 2015

Nowadays when anyone asks about my age, I would reply half in jest that I would be old enough to start withdrawing from my Central Provident Fund (CPF) - the national savings scheme - next year.

Hitting 55 - the age at which a person can take out the portion of his CPF savings that is not set aside for retirement needs - doesn't seem like such a big deal to me. Except for a receding hairline and the need to start wearing reading glasses, I still look and feel pretty much like I have always been.

Still, crossing 55 is an important milestone for many people. Survey after survey done by financial institutions such as DBS Bank show that Singaporeans aspire to stop working after they hit 55, if they can afford it.

On average, there are about 60,000 CPF members who turn 55 every year, and they need to make some very important decisions on the savings squirrelled away in their CPF accounts.

For one thing, my cohort will be the first to be affected by the recommendations of the CPF review panel. This will give us the option to lock away a basic sum of $80,500, a full sum of $161,000, or an enhanced sum of $241,500 for our retirement needs.

We can withdraw any amount above the basic sum if we own a property which we have used our CPF money to pay for. But even if we fail to make that benchmark, we can still take $5,000 out of our CPF account.

As such, one key decision we have to make at 55 is whether to take out any remaining CPF balance after fulfilling the basic retirement sum requirement.

Based on the breakdown given by the Government, just over half of us - or around 33,000 people - will have more than the basic sum in our CPF account.

Some will want to take the excess CPF savings out at the earliest time possible as they are worried they may not be able to do so later on if, say, there is a change in government policy on CPF withdrawals. Others may want to use the funds to finance their children's tertiary education, or invest in a business.

But my gut feel is that many of us will be happy to leave our CPF money where it is. This is because it is impossible to find another investment whose returns match those offered by the CPF year after year without incurring significant risks.

From next January, CPF members aged 55 and above will earn 6 per cent interest on the first $30,000 of their CPF funds, 5 per cent on the next $30,000 and 4 per cent on the rest of their retirement savings.

That beats by a big margin the best quote of 1.4 per cent which I have been able to get from the bank on my 12-month fixed deposit. But a bank may go bust even if the possibility is remote, and in such a situation, a saver will find that only the first $50,000 of his deposit is guaranteed.

As such, one other big attraction of the CPF is that the principal and interest payments are guaranteed by one of the few remaining triple-A rated governments in the world. That is something savers all over the world would kill to have.

For an example, just watch the recent stampede by millions of British pensioners to snap up the three-year bond offered by their government which pays about 4 per cent interest. Yet, the amount they could buy was capped at a mere £10,000 (S$21,000).

There is a further consideration - the threat of deflation hovering over the global economy and the dampening effect this has on commercial interest rates.

When I was an undergraduate in England 35 years ago, the big challenge was double-digit inflation which eroded the value of money as prices of food and other essentials rose sharply.

Now, in the latter part of my working career, I have to grapple with a mere 0.05 per cent interest on my POSB savings account and the unusual prospect that, excluding housing, my money can buy more - whether it is clothing, laptops, air tickets or even petrol until the recent hike in excise duties.

It is a curious phenomenon also occurring elsewhere in developed economies such as the United States. This has led to worries that people may start hoarding cash and delay purchases, causing prices to drop further.

The upshot is negative real interest rates in countries such as Switzerland and Germany where investors actually pay the government to look after their money when they buy the bonds issued by it.

In 2013, there were about 12,000 people, or 20 per cent of the CPF cohort who turned 55, who did not withdraw their balances above the then so-called minimum sum of $148,000 that had to be placed in their retirement accounts.

I believe these must be the savvy savers who concluded that it would be much tougher to get the same returns as those offered by CPF, if they had tried to invest on their own.

The irony is that they were also likely to be people with other sources of finances, meaning they did not have to rely as much on their CPF monies for their retirement expenses. In my cohort, there will be similarly-minded people who will max out their CPF retirement savings at the enhanced level of $241,500.

One part of the retirement equation is not addressed in this column - whether we should put our retirement savings into the annuity scheme known as CPF Life Standard, or continue to leave the bulk of it in cash under CPF Life Basic when we turn 65. But that is another story for another day.