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An Overview of CPF in Singapore

CPF (Central Provident Fund) is a compulsory savings and pension scheme designed for employed Singaporeans and permanent residents. If you are unfamiliar with the CPF system, here are some key points to note.

One of the primary advantages of having savings in CPF is the interest it earns. As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

CPF is essential as it helps individuals fund their retirement, healthcare, and housing needs. For individuals under the age of 35, 20% of their income goes into their CPF, while employers contribute an additional 17% of their salary.

For example, if you earn $1,000, your take-home pay would be $800, with $200 contributed to your CPF and your employer adding $170 on top of your salary. The money contributed is then divided into three accounts: the Ordinary Account (OA), Special Account (SA), and Medisave Account.

Here is a breakdown for individuals aged 35 and below, although do note that the CPF OA contribution amount gradually decreases for older age groups:

  1. Ordinary Account (OA): 23% of monthly contributions are credited here. It earns an interest rate of 2.5% and can be used for purchasing a house, insurance, investments, and other purposes.
  2. Special Account (SA): 6% of monthly contributions are allocated to this account. It offers a higher interest rate of 4% and is primarily intended for retirement. However, any amount exceeding $40,000 can be withdrawn and invested.
  3. Medisave Account: 8% of monthly contributions are deposited here. Medisave funds can be used for hospitalization expenses, medical and long-term care insurance, starting from age 30 with the implementation of Careshield Life.

It is important to note that the contribution percentages differ for various age groups.

To maximize your OA and SA accounts, you can consider investing your CPF OA under the CPF Investment Scheme (CPFIS). The CPF OA can be used to purchase “professionally managed products” such as retail unit trust funds, stocks (up to a 35% cap), and gold (up to a 10% cap).

However, if you plan to buy a house in the near future, carefully consider if you have enough time to hold investments in your OA before utilizing the funds for housing. Investments carry risks, and selling them at a loss is not desirable.

In my opinion, investing CPF OA is worthwhile, as I have managed diversified portfolios that have achieved returns higher than 2.5% per annum. Note that the first $20,000 in your CPF OA cannot be invested, so the investable sum for professionally managed products is (OA amount – $20,000). For example, if you have $50,000 in your OA, only $30,000 is available for investment.

Building your CPF SA account is crucial for retirement, and it cannot be used for mortgage payments or medical expenses. Transferring funds from OA to SA allows you to benefit from the higher 4% interest rate offered by the SA, but this transfer is irreversible.

Personally, I am not a strong advocate of this transfer as CPFOA may be needed for mortgage purposes. However, cash top-up to CPF SA provides tax relief, especially as you enter higher tax brackets. Cash top-up to CPF SA is tax-deductible for up to $8,000 annually. There is a cap up to the Full Retirement Sum (FRS) of that year, which in 2023 is $198,800. It’s worth noting that once you reach the FRS with your CPF SA, you will always be above the FRS since CPF SA compounds at 4% per annum, whereas FRS increases at a rate of 3.5% per annum.

Even if you choose to invest your CPF SA funds, be aware that the invested amount is still considered for FRS calculation. Consequently, no further top-ups to CPF SA are allowed once you reach the FRS (permanently).

Note: The same $8,000 annual tax relief limit is applicable for cash top-ups to Medisave as well. Medisave also has its own limit, known as the Basic Healthcare Sum (BHS), which in 2023 is $68,500.

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