The announcement that the CPF Special Account (SA) will be closed from early 2025 for individuals aged 55 and above has caused concern among some CPF members. Many of these members are “CPF-rich,” having counted on the SA’s risk-free interest of 4.08% p.a. and the ability to withdraw funds anytime after setting aside the Full Retirement Sum (FRS) or the Basic Retirement Sum (BRS) with a property pledge in their Retirement Account (RA).
SA Shielding Strategy
Many individuals were able to retain substantial SA balances by using the SA shielding strategy. This involved investing amounts over S$40,000 from their SA before their RA was created at age 55. After turning 55, the investments were sold, and the money, including any profit, was returned to their SA, allowing them to continue enjoying the 4% p.a. interest. However, with the closure of the SA for those aged 55 and above, this strategy will no longer be available from 2025.
Personally, I remember using this strategy when I turned 55 in 2019. At the time, I aimed to build significant savings in both my SA and RA, knowing they offered competitive returns of at least 4% p.a. Today, thanks to compounding interest and mandatory CPF contributions, I’ve accumulated around S$300,000 in my SA. My retirement plan involved treating my SA like a fixed deposit, withdrawing the annual interest of approximately S$12,000 while leaving the principal untouched. Meanwhile, I’ve been consistently topping up my RA to reach the Enhanced Retirement Sum (ERS), expecting S$2,300 in monthly CPF LIFE payouts for life. Paired with annual SA withdrawals of S$1,000, this would form the foundation of my guaranteed income during retirement, supplemented by other investments.
The Shift – What’s Next?
The government’s decision to close this “loophole” through a new interest rate principle aims to rationalize the CPF system. Their explanation is straightforward—short-term savings should only earn lower interest rates, while long-term savings attract higher rates. It’s a logical change.
For those affected by this change, including myself, this is an opportunity to review retirement plans and assess how to optimize CPF savings alongside other financial resources. Under the new rules, any savings in the SA and OA up to the FRS will be moved to the RA when members turn 55. As the SA will be closed, remaining balances will go to the OA, earning the lower interest of 2.5% p.a. Future CPF contributions from employers and employees will now flow into the OA, RA, and Medisave Account (MA). Once the RA reaches FRS or the MA reaches the Basic Healthcare Sum, excess contributions will move to the OA. Additionally, SA investments made before age 55 will also be transferred to the OA, if the FRS has been met.
On a positive note, starting in 2025, CPF members will be allowed to top up their RA to the ERS, which will increase to four times the BRS—equating to S$426,000. This revision will enhance retirement adequacy, as higher monthly payouts from CPF LIFE are expected.
5 Tips for CPF Members Aged 55 and Above:
- Transfer OA savings to the RA up to the ERS to enjoy higher CPF LIFE payouts.
- Keep funds in the OA, treating it like a fixed deposit at 2.5% p.a.
- Invest OA money under the CPF Investment Scheme (CPFIS) in T-bills, fixed deposits, insurance plans, etc. Liquidate when needed and return proceeds to the OA.
- Withdraw savings (beyond the FRS) for investments not covered by CPFIS.
- Use the funds (beyond the FRS) for immediate financial needs if necessary.
My Next Steps
Assuming I have around S$300,000 in SA savings next year, I will likely use one-third of this to top up my RA to the new ERS of S$426,000 and continue making top-ups until I reach 65. CPF Board estimates that my monthly payouts will be around S$3,200 under the CPF LIFE Standard Plan from age 65—an increase from the S$2,300 I initially expected under the older ERS structure.
The remaining S$200,000 will be moved to my OA, resulting in a 1.58% loss in interest (4.08% to 2.5% p.a.). Since I don’t have immediate liquidity needs, I’ll keep the funds in my OA and invest much of it under CPFIS for potentially higher returns. I may also withdraw some for external investment opportunities outside of CPFIS.
In today’s environment of elevated interest rates, it’s easier to find low-risk investment options that offer returns close to 4% p.a., such as Singapore T-bills, Singapore Savings Bonds, corporate bonds, or retirement insurance plans.
Clarifying CPF LIFE Plans
There has been ongoing debate about when one should “ideally” pass away to maximize CPF LIFE returns, but it’s important to remember that CPF LIFE is an insurance product, not an investment. It’s designed to provide lifelong monthly payouts and protect against longevity risk. As medical advances continue, predicting one’s lifespan is impossible. Those who live longer will receive more than their original CPF LIFE premiums.
It would help if the CPF Board reinstated bequest information in the CPF LIFE Estimator, which was removed in 2021. Given that CPF LIFE is an annuity, such information is valuable, similar to other life insurance policies.
Deciding Between CPF LIFE Plans
Upon reaching 65, CPF members can choose from three CPF LIFE plans:
- CPF LIFE Escalating Plan – Lower initial payouts compared to the Standard Plan, but they increase by 2% annually. It takes about 23-25 years for the cumulative payouts to equal the Standard Plan.
- CPF LIFE Basic Plan – Lower payouts than the Standard Plan, but higher bequests for beneficiaries, up to a certain age. RA savings are used to fund payouts until depletion (around age 90), after which payouts come from the CPF LIFE pool.
- CPF LIFE Standard Plan – Offers the highest initial payouts, with 100% of RA savings deducted as the CPF LIFE premium.
No matter the plan, if you pass away, your beneficiaries will receive any remaining CPF LIFE premiums. The interest earned is used to ensure continued payouts for other members.
Conclusion
To fully benefit from CPF LIFE, a long (and hopefully healthy) life is ideal. I’ll choose the plan that meets my retirement income needs, focusing less on bequests or maximizing returns. It’s essential to be proactive about financial knowledge, investments, and risk profiles. Working with professional financial advisors can help close any gaps and boost financial security.
Empower yourself and make informed decisions to optimize your retirement plan!
Ready to take control of your financial future?
Consider scheduling a financial health check with a Financial Advisor. Whether you’re just starting your financial journey or looking to optimize your existing plan, a Financial Advisor can provide personalized guidance tailored to your unique goals and circumstances.
Learn more about: Smart Financial Planning Tips for New Families: Build a Secure Future