As discussed in Part One of this article, there are many pluses and minuses around the CPF (Central Provident Fund), and it is something that everyone needs to look at from their own unique perspective. What works for someone, will not be so appealing for the next person. There is no right – or indeed wrong answer, but it is more a case of choosing the best option for you and your family, or the least bad one. To muddy the water even more, there are two other factors that should be taken into consideration when deciding what to do with those funds you have worked so hard to amass.
The Scheme Itself
The government run scheme is made up of three discrete sections: the OA (Ordinary Account, mainly used to fund the account holder’s residential needs), the SA (Special Account, predominantly ringfenced for the individual’s retirement funds) and the MA (Medisave which is purely for healthcare).
By law all working Singaporeans pay 20 % of their income every month into the scheme, with the government contributing a similar amount (that amount currently stands at 16 %). The thinking behind the arrangement is to force people to prepare for when they are no longer able – or want to – work, when it is hoped they will have enough put away to pay for a roof over their heads, any medical treatment they will need, along with enough “spare cash” to enjoy their twilight years without having to scrimp and save and worry about putting food on the table.
And to a certain extent it has worked very well. The debates that rage are almost always focussed around the flexibility the scheme gives its participants on how they manage the money.
The Retirement Sum Topping-Up Scheme (RSTU)
The RSTU is a scheme that not only gives another option for individuals on how they spread their money, it is also a safety net for the older generations who through no fault of their own are perhaps struggling to get by on the funds they have accumulated themselves. It works by allowing individuals to top up not only their own different accounts, but those of their loved ones.
You can top up with either cash, or by transferring your CPF savings. You are able to transfer cash to anyone, whereas if you are taking the transfer option then the recipient has to be either yourself, your parents or your grandparents, or your spouse and their parents and grandparents. In this case, the funds will go to the recipient’s SA (if they are below the age of 55), or into their RA (Retirement Account) if they are 55 or older.
There is one further benefit from transferring cash in just this way, which should not be ignored.
Tax Relief
Moving money into such funds does have its disadvantages as we discussed in the first article, but one big plus point is the issue of tax relief, which if looked at another way, is free money. From the government.
By topping up your own funds as described above, you are liable for up to $7000 tax relief every calendar year. If you are also topping up your loved ones’ accounts, you can get a further $7000 each year. You can achieve this as long as you use cash to top up the accounts, and that the SA or RA do not exceed the Full Retirement Sum (FRS), an amount that is increased year on year.
Finally, if you are planning on transferring funds, no matter where or to whom, one thing to keep in mind is that by doing it early in the year (i.e. January as opposed to December) you will benefit from substantial extra earnings from the interest (up to 20 % over ten years).
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