For many people, one of their goals in life is financial security. One way the Singapore government is helping individuals achieve financial security is through the Central Provident Fund (CPF).
Speaking at the 6th Citi-SMU Financial Literacy Symposium, Minister for Manpower Josephine Teo said: "CPF helps working people save more than they realise. When you start work, every month, 37% of your pay goes into CPF. 20% comes from you, out of your gross salary. On top of this, your employer puts in another 17%. As long as you earn more than S$50 a month, you already get CPF contributions from your employer."
In Singapore, the CPF contributions are divided into three accounts:
- Ordinary Account (OA): Can be used for housing, helping over 90% of households own their homes - especially when it comes to a Housing Development Board (HDB) flat.
- MediSave Account (MA): Can be used for MediShield Life and CareShield Life premiums.
- Special Account (SA): For retirement cash spending.
#1 CPF - "can see, cannot touch"Fact: Most people start using their CPF quite early, to build up a housing asset and meet big healthcare expenses.
In terms of housing, she shares an example of a Singaporean couple who both start working at age 25. If they both earn S$2,500 a month, they will receive S$575 in their OA every month. By the time the couple is 28 years old, both would have accumulated a combined amount of around S$44,000 in their OA.
If they buy a 4-room BTO along Punggol, it costs around S$340,000. After government grants to help first-timers, the flat costs S$300,000. Their combined OA savings will be more than enough to cover the down-payment of S$30,000.
"With a modest salary increase since they started work, their monthly contributions to the OA will cover fully the monthly loan payment. i.e. they probably need not fork out cash. Before they turn 55, their house will most likely be paid up already, without any out-of-pocket cash payment," minister Teo said.
In terms of medical expenses, if a Singaporean is hospitalised, the MediShield Life premiums paid through their savings in the MA will cover a large part of the bill, she said. The MA can also be used to pay part of the remaining cash payment that insurance does not cover. At the same time, the MA can also be used to cover your immediate family members' medical expenses, such as parents' hospital bills and MediShield Life premiums.
#2 CPF pays the 'lowest returns' in the world among retirement fundsFact: The CPF helps Singaporeans earn a risk-free interest rate that few investment instruments can match.
The savings in the SA earn as much as 5%, risk-free, with no way the principal may be lost, even partially, the minister said. This is higher than the returns offered by popular retail bonds by Temasek (2.7%) and Singapore Airlines (3.03%).
The long-term nature of CPF savings also maximises the power of compounding. For example, S$1,000 in the SA from age 25 will multiply in value by seven times, turning into S$7,000 by age 65.
#3 CPF rules are changed secretly due to investment lossesFact: CPF money is invested in Special Singapore Government Securities, which are issued and guaranteed by the Government.
Minister Teo explained: "The securities are then invested, but CPF members bear no risk at all. It is the Government that takes the investment risk and shields you from it. This means that CPF savings and interest are always safe. Regardless of financial market conditions and how the investments perform, the interest paid on your CPF savings and the principal sums are protected."
Fact: Rule changes that impact members are always made known in advance.
These changes are fully explained in Parliament and publicly announced.
For example, in 1987, the Government introduced the idea of the minimum sum - known today as the Full Retirement Sum (FRS).
This meant that members were required to set aside the FRS at age 55. Beyond that, they could withdraw their savings. On top of that, if they have a fully-paid home, only half of the FRS needs to be kept and the rest can be withdrawn. This is known as the Basic Retirement Sum.
The FRS and BRS are updated regularly to reflect changes in living standards. 20 years ago, in 1987, the FRS was just S$30,000. This means that when the person turned 60 in 1992, the savings provided a monthly payout of about S$300. However, that amount would be considered too little for most people today. Hence the FRS was updated to S$176,000 to allow a member to get monthly payouts of around $1,400 for life.
Additionally, the CPF Board also does what’s in the members’ best interest, minister Teo said.
Sharing an example, she elaborates: "Members can start their monthly retirement payouts anytime from age 65. They just need to instruct CPF Board. But more than 1 in 4 residents aged 65 and above today continue to work and may not need their payouts just yet. If they do not instruct CPF Board, the money remains in their RA earning the much higher interest rate than if it had been pumped into their bank account automatically. This can go on for another 5 years!"
Myths surrounding the increase in statutory retirement age and age of re-employmentMoving forward, the statutory retirement age will go up from 62 to 63 in 2022 and then to 65 by 2030; and the age of re-employment will go up from 67 to 68 in 2022 and then to 70 by 2030.
To dispel any misconceptions, minister Teo explained:
- While the re-employment age will be increased, Singaporeans can retire at any age of their choice. The law is there so employers are unable to ask people to retire too early - they are there to protect Singaporeans who choose to continue working.
- If someone chooses to work till 70, they can still start their CPF withdrawals at 55 or 65. At 55, members will be able to withdraw some amounts and from 65, the rest can start to be streamed out monthly.