Is increase in minimum sum a bad thing?
There has been much discussions on the CPF minimum sum recently again. The CPF minimum sum will be raised to $155,000 from July 2014. This amount has been raised consecutively for at least the past 10 years. From $80,000 in 2003 to $155,000 in 2014. Of course, people will naturally be unhappy since they realised that the amount they can take out from their CPF becomes lesser and lesser. If you do not meet the minimum sum, you can only take out a maximum of $5000 from your CPF. I'm only in my 20s now and by the time i'm 55, the minimum sum will be much higher. Some people might ask will we be able to take out our CPF money at all?
I've done some research on the whole CPF structure and now i understand where the government is coming from. My parents have reached 55 and they are still confused about how the whole system works. There is just too much noise and confusion out there. That is why i decided to embark on my own research to find out more. The CPF scheme may not be that bad an impression as what was painted outside and in social media. I'll explain this in a simple and direct way. I'll only touch on what most people are concerned on.
What is CPF for?
This is a simple question with a simple answer. The CPF is for our retirement. We have to understand that this is our own money and the government is in no way trying to keep or take our money. When a person reaches 55 years old, a retirement account will be opened. Let's take a look at 2 different scenarios:
When you reach 55 years old
1) A person who does not meet the minimum sum of $155,000
If a person only has $100,000 in his Ordinary account (O.A) and Special account (S.A) combined, he can only withdraw a maximum of $5000 at age 55 and the rest will be put into his/her retirement account(R.A) in CPF. This works out to be $95,000 in his/her R.A.
2) A person who meets the minimum sum of $155,000
If a person has $200,000 in his OA and SA account combined, he can withdraw all of the money less the minimum sum. He/she can withdraw $45,000 at age 55. Therefore, $155,000 will be put into the RA account.
However, there is also a medisave minimum sum(MMS) which we need to meet. The MMS will be $43,500 from 1 July 2014. If you do not have this amount in your Medisave, you'll need to top it up with your OA and SA to make up for the shortfall before you can withdraw the balance after meeting the minimum sum.
3) A person who meets or does not meet the minimum sum of $155,000 and pledges his/her house
You can pledge your house value up to half of the minimum sum. This means for a minimum sum of $155,000, you can pledge up to $77,500. By pledging your house, you can actually draw out more money, which means you can take out an extra of $77,500 out in cash from your CPF once you reach 55. However, because you draw out more money at age 55, your RA account will have lesser money and you will receive lesser monthly payout at your draw-down age. For those born after 1953, the draw down age is 65.
For example, if you have $200,000 in your OA and SA currently, you can withdraw $122,500 out from your CPF at age 55 if you pledge your house. This is more than the $45,000 previously for a person who does not pledge his/her house. If you have less than the minimum sum in your OA and SA combined, your house will be automatically pledged up to 50% of the minimum sum to make up for the short fall. For example, if you have $100,000 in your OA and SA, your house will be automatically pledged.
However, do take note that you can only pledge up to the amount you pay for your housing loan using CPF. If you used only $50,000 in your CPF to pay for your house, then you can only pledge up to $50,000.
*Note: If you pledge your house and then decide to sell your house after that, you'll have to return back the pledged amount plus interest back to your CPF account.
Sources: http://mycpf.cpf.gov.sg/Members/Gen-Info/FAQ/MinimumSum.htm
What is the retirement account used for?
The RA account is used to pay for your retirement needs. Depending on how much you have in your RA account, you'll receive a monthly sum of money at your draw-down age. As mentioned earlier, the draw-down age for those born after 1953 is age 65.
The money in your RA account can be put into a scheme called the CPF life. You will be automatically placed on the CPF life scheme if you're born in 1958 and after. For those born before 1958, you have a choice to join CPF life or remain on the minimum sum scheme.
So what is the CPF life? As quoted from the
CPF life FAQ page: "The CPF Lifelong Income For the Elderly (CPF LIFE) Scheme provides you with a monthly payout starting from your drawdown age (DDA), for as long as you live. It improves on the Minimum Sum (MS) Scheme, where payouts only last for about 20 years."
CPF life scheme
Meets minimum sum and on CPF life scheme
CPF life pays you a monthly sum of money for as long as you live. You do not have to worry about depleting your RA account on the minimum sum scheme which only pays up to 20 years. With this, a person who meets the minimum sum of $155,000 and is put into the CPF life scheme will
receive a monthly payout estimated to be around $1100-$1200 at draw-down age. This monthly payout is not fixed and will be adjusted from time to time. I'm not sure how they calculate the payout though. You can use a
CPF Life payout calculator to estimate the monthly payout you will receive.
Do not meet minimum sum
If a person does not meet the minimum sum, he/she will still be automatically placed on the CPF life scheme if:
1) He/she is born in 1958 or after and
2) Has $40,000 in RA at age 55 or
3) Has $60,000 in RA at draw down age
If a person is born before 1958, he/she can choose to stay on the minimum sum scheme which is to draw down his/her RA funds for 20 years or choose to join in the CPF life scheme to receive monthly payout up till death.
If you are born in 1958 or after, with less than $40,000 in your Retirement Account (RA) at 55 or less than $60,000 in your RA at 65, you can apply to join CPF LIFE instead of remaining on the MS Scheme. While CPF LIFE provides a monthly payment for as long as you live, the MS Scheme provides a monthly payment until the monies in the RA runs out.
Sources: http://mycpf.cpf.gov.sg/Members/CPFSchemes/CPF_LIFE.htm
The more money you have in your RA, the better the payout
The minimum sum was raised to ensure better payout for Singaporeans when you're old. Imagine if the minimum sum is still at $80,000 in 2003 and has not raised till now, what would be the monthly payout you will receive? Using a
CPF Life payout calculator, the monthly payout is estimated to be $695 to $766. Is this enough to survive on?
Of course, we can argue that why not the government give us all our CPF money at age 55 and not have all these CPF life scheme or this minimum sum thing? It's our money after all and we can decide how we want to spend it right? Don't the government trust us to manage our own money? The truth is, very few people will be able to manage their money wisely. Either we spend it lavishly to enjoy or we get cheated of our money at old age. This has happened a lot of times. Some gamble it away while some fall into scams. This is the reality. With this, the CPF schemes act as a safety net to prevent escalating social problems.
So, with the minimum sum raised to $155,000 from 1 July 2014, the estimated payout is about $1200 monthly. This is a decent sum to live on during retirement and we do not have to worry about having not enough money at all if we're under CPF life scheme. It's like an allowance you will get for the rest of your life. Sounds like back to school days when your parents gave you an allowance?
What happens if you die early?
When we talk about retirement, we have to bring in the topic of death. If you die before you can receive the monthly payouts, then the
total amount in your RA + interest + the unused annuity premium paid on CPF life, will be paid to your beneficiary whom you nominate under the CPF nomination scheme.
If you die after receiving your monthly payouts say age 75, then the
total amount in your RA + interest + unused annuity premiums paid - annuity payouts, will be paid to your beneficiary. You can use the
CPF life payout calculator to gauge roughly how much your bequest will receive at different stages of your life.
Sources:
http://mycpf.cpf.gov.sg/Members/CPFSchemes/CPF_LIFE.htm
Conclusion
I hope by writing the above information, you can have a better understanding of how the CPF schemes work. CPF is for your retirement. People may not like it since it feels like our money is locked up in it. It is in actual fact a forced savings scheme which delays our gratification. Even when you save money yourself, it's the same feeling. But how many people are disciplined to force themselves to save? Most probably when we see the latest gadget, the great Singapore sale or the travel sales, we'll unknowingly spend it all away.
Of course as with every other schemes, there will surely be weaknesses in it. Some argue that the interest paid on the CPF OA account at 2.5% is too low. Yes i agree its low and not enough to fight inflation but then again for those who have no investment knowledge, getting 2.5% anywhere is virtually non existence now. Remember the banks only pay 0.05% on your savings account currently. We can only hope that the interest rates in CPF will rise in the future. CPF OA interest rates did rise to above 4% during the late 1990s.
*Note that CPF minimum sum has been renamed as Full Retirement Sum. Refer to my other article here for more information on the changes to the CPF system
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