The Central Provident Fund (CPF) is a comprehensive social security savings plan that has been a cornerstone of Singapore’s social policy since its introduction in 1955. It is a mandatory savings plan for all working Singaporeans and Permanent Residents, with contributions made by both employees and employers. The CPF provides a safety net for retirement, healthcare, housing, and education.
One aspect of the CPF that has evolved significantly over the years is the CPF Life scheme, which provides monthly payouts for life to CPF members from their retirement age. CPF Life was introduced in 2009 to replace the earlier Retirement Sum Scheme (RSS), which had been in place since 1987.
The RSS allowed CPF members to receive a monthly payout from their retirement savings until the funds were depleted. However, many CPF members were concerned that they might outlive their savings, especially as Singapore’s life expectancy continued to rise. The CPF Life scheme was introduced to address this concern, providing a lifetime stream of income for CPF members.
The CPF Life scheme has undergone several changes since its introduction. Initially, CPF members could only choose between the Standard Plan and the Basic Plan. The Standard Plan provided higher monthly payouts but a lower bequest, while the Basic Plan provided lower monthly payouts but a higher bequest.
In 2015, a new plan, the CPF Life Escalating Plan, was introduced. This plan provided a lower initial payout but with a 2% annual increase in payouts to account for inflation. The introduction of this plan provided CPF members with a new option to consider, especially for those who wanted to maintain their purchasing power over time.
Another significant change to CPF Life came in 2018, with the introduction of the CPF Life Basic Plan with escalating payouts. This plan combines the features of the Basic and Escalating Plans, providing a higher initial payout than the Escalating Plan, but with an annual increase of 2% to account for inflation.
How CPF LIFE works
To be eligible for CPF Life, individuals must have at least S$60,000 in their CPF Retirement Account (RA) when they start their monthly payouts. The amount in the RA is created when an individual turns 55 years old, and a portion of the funds from the Ordinary Account (OA) and Special Account (SA) is transferred to the RA to form the retirement sum.
The payout amount from CPF Life is determined based on various factors such as gender, age, CPF interest rates, and mortality rates. There are three CPF Life plans to choose from – Standard, Basic, and Escalating. The Standard plan pays a higher monthly payout but leaves less money for beneficiaries, while the Basic plan has a lower monthly payout but a higher bequest amount. The Escalating plan has a lower starting payout but increases by 2% every year.
The default payout age for CPF Life is 70, but individuals can choose to start receiving payouts anytime from 65 to 70. It is worth noting that deferring the payout can lead to a higher monthly payout, up to 7% for every year deferred.
Choosing the best CPF LIFE plan Deciding on which CPF Life plan to choose can be a daunting task, but it ultimately depends on an individual’s financial goals and circumstances. The Standard plan is ideal for individuals who want a higher monthly payout and do not mind leaving less for their beneficiaries. The Basic plan is suitable for individuals who prioritize leaving a higher bequest amount for their loved ones, even if it means receiving a lower monthly payout. The Escalating plan is ideal for individuals who are willing to receive a lower starting payout but have an increasing payout as they age.
CPF LIFE Plans
The CPF LIFE Standard Plan is the default plan that offers a higher level of monthly payouts, albeit at the expense of a lower bequest.
Alternatively, the CPF Life Basic Plan provides a higher bequest while offering lower monthly payouts. It is worth noting that the CPF Life Basic Plan’s monthly payout gradually decreases once the combined CPF balances fall below $60,000. This is attributed to the extra interest that is earned on the first $60,000 of the combined CPF balances, which is credited to the Retirement Account (RA) and paid as part of the monthly payouts. As the balances deplete, the extra interest earned and subsequent payouts also decline.
On the other hand, the CPF LIFE Escalating Plan provides a solution that addresses inflation. The plan offers payouts that increase by 2% each year, enabling CPF members to maintain their standard of living as prices rise over the years. Under this plan, a CPF member who begins receiving a monthly payout of $1,000 at 65 years of age can expect to receive approximately $1,500 by the time they turn 85.
Choosing the right CPF LIFE Plan for you
When it comes to choosing between the three CPF LIFE plans, you can ask yourself a few questions. Do you want a higher monthly payout, or are you more concerned about leaving a bigger inheritance for your loved ones? Alternatively, would you rather have a lower starting payout that increases by 2% each year to keep up with inflation?
However, we think that this method of choosing a plan might be a little too simple. In our opinion, it’s better to take the time to really understand the details of each plan so that you can make an informed decision. By doing so, you can be sure that you’re choosing the plan that’s best for your individual needs and circumstances.
When it comes to CPF LIFE, it’s important to note that it’s an annuity plan where premiums are paid from your CPF savings. The premiums are then pooled together with other CPF LIFE participants’ premiums in the LIFE fund. The amount of payouts you receive will depend on how long you live, so people who live longer will benefit more.
However, if CPF LIFE generates less than 4% returns, it may be better to keep your CPF savings in your retirement account, which generates a guaranteed 4% return.
It’s also worth noting that CPF LIFE returns are higher for those who only participate with the basic retirement sum. If you double your CPF LIFE participation amount from $96,000 to $192,000, your payout range won’t double, so it’s important to consider this when making your decision.
To help individuals decide on the best plan, CPF provides an online CPF Life estimator tool that allows individuals to compare the payouts and bequest amounts for each plan based on their specific financial circumstances.
What we will do
If I had to choose my CPF LIFE payout plan right now, I would go with the Basic Plan.
In addition to that, I would also pledge my property to reduce my participation in CPF LIFE, so that I only need to fulfill the basic retirement sum of $96,000. The reason for this is that I can still get a guaranteed 4% return from my Retirement Account (RA) or Special Account (SA).
Moreover, I’m confident that I can achieve even higher returns from investing my money elsewhere.
It’s important to note that there’s no one “best plan” that suits everyone’s financial circumstances. You should consult with the CPF board or a professional advisor to work out a proper retirement plan before making any decisions.
Benefits of CPF LIFE
CPF Life provides several benefits for individuals who participate in the scheme. Firstly, it offers a reliable and steady stream of income during retirement, which can help individuals manage their finances and maintain their standard of living. Secondly, CPF Life offers a higher interest rate compared to other retirement income products, providing individuals with a better return on their investment. Finally, CPF Life ensures that individuals will not outlive their savings, as the scheme provides lifelong income, regardless of how long the individual lives.
In conclusion, CPF Life is an essential social security program in Singapore that offers lifelong income to Singapore citizens and permanent residents during their retirement years. Choosing the right plan depends on an individual’s financial goals and circumstances, and CPF provides tools to help individuals make informed decisions. With CPF Life, individuals can have peace of mind knowing that they have a reliable source of income during their retirement years.
