Winston Lim, Head of Deposits and Asset Management at UOB, answers all these and other questions.
The Central Provident Fund (CPF) is a savings scheme set up by the Singapore government to help citizens with housing, medical bills and retirement planning.
CPF members have three accounts: the Ordinary Account (OA) for retirement savings, housing, insurance and investments, a Special Account (SA) for retirement savings and retirement-related financial products, a Retirement Savings Account (RA) where citizens aged 55 and above receive monthly payouts, and the Medisave Account (MA) which is used for hospital expenses and approved medical insurance.
Funds in the OA will earn an annual interest rate of 2.5%, while the SA, RA and MA accounts will earn CPF members an annual interest rate of 4.05% in Q2 2024. The interest rate for the latter three accounts is linked to the 12-month average yield of the 10-year Singapore Government Bond (10YSGS) plus 1%.
In his Budget speech on 16 February, Deputy Prime Minister (DPM) Lawrence Wong, who is also Singapore’s Finance Minister, announced that the SAs of CPF members aged 55 and above would be closed.
At the same time, Wong announced that the enhanced pension amount (ERS) will be increased to four times the basic pension amount (BRS) from 2025, up from three times as before. The current ERS, which is the maximum amount CPF members can receive for their CPF Life pension payouts, is $308,700 for 2024. The ERS will be increased annually. In 2025, the ERS will be $426,000. The ERS will be increased to $440,800 in 2026 and $456,400 in 2027.
The Edge Singapore spoke to Winston Lim, Head of Deposits and Asset Management at United Overseas Bank U11
(UOB) on depositing more money into one’s CPF account, opting for the ERS and more.
The Edge Singapore: What does the closure of the SA account for those aged 55 and above mean for investors (or people looking to make the most of their CPF)?
Winston Lim (WL): From early 2025, CPF members aged 55 and above will have their CPF SA balance transferred to their RA up to the full retirement sum (FRS), with the RA funds continuing to benefit from attractive long-term interest rates.
After the RA transfer, any excess SA funds are deposited into the OA and remain withdrawable but receive a lower interest rate.
To benefit from long-term interest rates and receive higher monthly payouts after retirement, CPF members may consider topping up their RA with cash or making OA transfers up to the applicable ERS.
Such top-ups and transfers to the RA are irreversible, so CPF members should ensure that they accept the CPF LIFE payout structure and have sufficient non-CPF funds for rainy days.
Should Singaporeans aged 55 and above opt for the ERS?
CPF members who meet the FRS requirements and have saved sufficient cash for their daily needs between the ages of 55 and 65 can increase their RA balance beyond the FRS up to the applicable ERS limit.
The increase will be reflected in higher monthly CPF LIFE payouts from age 65. For example, a member who turns 55 next year will be able to receive about $3,330 in CPF LIFE payouts monthly at age 65 under the CPF LIFE Standard Plan if they exceed their ERS limit, given the recent announcement that the ERS will be raised to $426,000 in 2025.
CPF members who realise that they may not have sufficient funds for their living expenses for the period between ages 55 and 65 should not overextend themselves by topping up to the ERS limit. They should prioritise their living expenses through OA withdrawals, especially if they do not have much cash saved or are unable to monetise their assets.
Shortly before age 65, they can then decide whether to pay any spare funds into their RA after having set aside an emergency fund for at least three to six months. CPF members can then enjoy a higher monthly payout after age 65.
What impact does the closure of the SA account of CPF members aged 55 and above have on the way interest is optimally utilized and how much money should one invest in their CPF in an ideal portfolio (i.e. one that yields maximum returns)?
To get the most out of their savings, CPF members may consider:
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a) Use cash top-ups or OA transfers to your own RA to benefit from higher interest rates. These top-ups are tax deductible.
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b) Top up your MA for future healthcare. MA top-ups are also tax deductible.
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c) Use funds from OA to repay outstanding home loans (if any) to reduce monthly mortgage payments with interest rates above 2.5%.
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d) Use funds in OA to invest in products such as Treasury bonds and mutual funds to potentially earn higher returns, depending on risk appetite. Note that increases in SA, RA and MA are irreversible.
What can investors do with their CPF withdrawals when they turn 55?
CPF members will not receive their monthly CPF LIFE payouts until they reach age 65. However, they can unconditionally withdraw up to $5,000 from their OA and SA at age 55, along with any remaining OA and SA savings above the FRS.
CPF members who have met the FRS requirements can treat their CPF OA account as a deposit account from which they can withdraw funds if they wish. The CPF OA interest rate is currently higher than general bank deposit rates, so it may be more attractive for investors to keep their money there.
Investors who are confident of achieving returns that exceed the OA rate may withdraw CPF funds in excess of the FRS and invest in financial instruments with higher returns. Investors must be aware of the risks of these higher-yielding instruments and weigh them against the guaranteed returns of the OA.
CPF members who intend to invest their funds withdrawn from CPF accounts in a regular deposit account may be at risk of falling victim to fraudsters.
To mitigate this risk, all three local banks offer a “funds lock” on their accounts, which allows a certain portion of savings to be “locked” from unauthorised digital access and hasty decisions. The UOB LockAway account, for example, locks earmarked funds from all online transactions such as digital payments and outgoing transfers, while still earning interest.
When should people start depositing money into their CPF account and should they deposit it into their OA, SA, RA or Medisave account?
CPF members should start practicing savings discipline as early as possible, preferably from the time they start working.
By making CPF contributions, savings are accumulated in three accounts: OA, MA and SA. An RA is established when CPF members reach the age of 55. When members are younger, a larger proportion of CPF contributions are allocated to their OA to support the purchase of a home. As members get older, more CPF contributions are allocated to their SA and MA to support increasing healthcare and retirement savings needs.
Given the higher interest rates on SA and RA, accumulating SA or RA over a longer period of time means that funds benefit from compound interest, allowing investors to grow their savings exponentially.
In addition to topping up their own account, members may also consider topping up the CPF accounts of their dependents. Deputy Prime Minister and Minister for Finance Lawrence Wong announced in his Budget Statement for FY 2024 on 16 February 2024 that the income threshold for tax relief for cash top-ups to spouses and siblings in tax year 2025 will be increased from $4,000 to $8,000 for top-ups made from 1 January 2024.
How much should you pay per month?
For voluntary contributions, CPF members should determine the amount they should contribute to their CPF account based on their financial situation, taking into account the long-term, irreversible nature of CPF top-ups and transfers. Investors should carefully review their finances and allocate funds for daily expenses, short-term investment goals and longer-term savings according to their needs and risk appetite.
For longer-term savings plans, funds invested in CPF accounts mean more predictable returns but less liquidity, while funds invested in instruments such as mutual funds, exchange-traded funds (ETFs) and bonds have higher liquidity but generally do not offer guaranteed returns. Therefore, investors should balance their long-term savings plan based on their risk-return requirements and liquidity requirements.
As for ordinary employee contributions, CPF contribution rates can range from 12.5% to 37% of monthly wages depending on age.
How can SRS and high-yield accounts such as the UOB One account or fixed deposits supplement CPF contributions?
Investors who have extra funds after allocating their CPF contributions may consider contributing to their SRS, as this can provide them with even more tax relief. However, investors should note that withdrawals from SRS accounts are only penalty-free if made at or after the statutory retirement age.
High-interest accounts such as the UOB One account are suitable for individuals who prefer liquidity and can qualify for bonus interest by meeting certain criteria such as minimum credit card spend, salary credit and/or GIRO bill payments. Such accounts complement CPF contributions as a short-term tool for investors to enjoy attractive interest, while the latter is used as a long-term retirement savings account.
With fixed deposits, individuals can take advantage of the special interest rates available to lock up funds for a specific term. When the fixed deposit matures, there are no restrictions on how the funds can be used and the interest generated can meet the individuals’ needs in retirement, be it for a vacation or to meet household expenses. They can also roll over the proceeds to a new fixed deposit upon maturity to further increase their savings.
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