CPF – What it is, and the Pros and Cons of the SA
The advantages and disadvantages of the CPF (Central Provident Fund) is a debate that’s been raging since it was introduced in 1955. As has the best ways to manage your money in the fund and whether it’s best to transfer funds into the Special Account as opposed to having it sat in the Ordinary Account. Here we take an impartial look at exactly what the CPF is, and the pros and cons of moving your money across.
What is the CPF?
In a nutshell, the CPF is a government run scheme designed to help residents to prepare for their retirement years. As part of the program, it is mandatory for all Singaporeans in employment to contribute 20% of their monthly pay, while their employers contribute 16% on top (the percentage employers are required to pay is regularly tweaked by the government as a reaction to the economic situation. When the economy is fully recovered, it is hoped that it will return to a level equal to the contribution made by the individual).
The scheme is made up of three separate accounts all with their own discrete functions:
• Ordinary Account (OA) – used predominately to fund housing
• Special Account (SA) – for retirement, and retirement related financial services
• Medisave Account (MA) – for healthcare
The interest rate for the OA is 2.5% and 4% for both the SA and MA. Once you have a combined total of $60,000, these rates increase to 3.5% (up to first $20,000 from OA) and 5% respectively.
The other main difference between the OA and SA is that you can dip into the OA, whereas once it is in the SA it is locked away – in the government’s reserves no less – until you are 55.
So, what are the arguments for transferring your money into the higher paying SA, and why are so many people reticent to do so?
The Advantages of topping up your CPF Special Account
There are many investment options available, but the benefit of the CPF’s SA is that it guarantees you not only a return, but a specified return. This means there is no confusion, no gambling on your future. The interest rate is (currently) at 5% (for those that meet the minimum criteria), and that is the return you will receive on your investment. Everything is guaranteed by no less than the Singapore government so as long as they are still around, your money is safe, and is growing. There are higher rates of return to be had in different forms of investment and trading, but their returns are far from guaranteed, and can and will fluctuate year on year.
Investing in the SA requires no skill, time or knowledge of the financial markets, or other investment channels. It is an easy option, and the rates of return are still higher than you will be offered by similarly safe options such as high street banks, insurance companies and the Singapore Savings Bonds. It is also higher than inflation (normally kept at around 3% in Singapore) which is another crucial requirement when planning a retirement fund.
Finally, if things were to take a turn for the worse in your personal financial situation, creditors cannot get hold of your money if it is locked up in the CPF. This is something that should be a consideration for small business owners, or anyone potentially threatened with bankruptcy.
The Disadvantages of topping up your CPF Special Account
The main disadvantage of moving all your money, or even a sizeable portion of your money into your SA is the simple fact that you can’t get it back whenever you want. All when and good for when you retire and you have a nice nest egg, but what do you do up until then? There is the small matter of having to find somewhere to live, which will involve a deposit. If you haven’t got the $25,000 to $150,000 you will invariably need for that in the OA, where do you get it from?
You may be forced to take out loans which will be charging a higher interest rate than you will be getting from the SA. Even after you have found a place to live, you still need to pay the mortgage, something that is normally done from the OA.
You never know what is going to happen around the corner. Circumstances change. You can have everything planned out, and are confident that you can get by even after transferring your money to the SA, but what happens if you are then confronted with unexpected expenses?
The idea behind the SA is all well and good, and there are stories of people planning on getting to a million dollars by putting all their funds into the higher earning account. But for it to work for you, you need to be very, very organised and on top of your monthly finances. You will, in effect be living on a cash only basis, something that can easily run away from you if not kept in very careful check. It also does not leave you much room for living in the here and now, or to help out other relatives who may be struggling.
Another huge factor in how manageable this is, is how much you are earning. If you can live comfortably on 80% of your earnings, and are able to put a little aside then you are in a position to make the decision. If that isn’t the situation, then in reality your hands are tied.
At the end of the day, it is your money. You have earned it. You have to decide if you want to give it to the government to look after until you retire.
Have extra cash in your OA, and would like to invest in new launch condos in Singapore? Do take note that if you are getting a second property, you need to set aside half of your retirement sum in your SA and/or OA.
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