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What Does The Removal Of The CPF SA Account, After Age 55, Mean For Your Retirement?

A discussion I have with a friend:

Me: Hey bro, you have been well? You must be enjoying taking life easy after turning 55.

Friend: Yes, it has been good. But I watched the 2024 Budget Announcement and it was a jolt out of the blue.

Me: Oh? Why so?

Friend: You know, I have set my finances out such that part of my retirement rests on the returns from the CPF-Special Account (CPF-SA), but now that’s off the table. I was so looking forward to the 4% interest rate in the CPF-SA to help fund my retirement. And the interest rate on the first $30,000 was even better, at 6% interest!

Me: I see. Yes. The closure of the CPF-SA after age 55 does impact people and their retirement.

Friend: So now, I understand the balances in my CPF-SA will be transferred to my CPF-Ordinary Account (CPF-OA). I am still deciding whether to transfer more to my Retirement Account, to have more in CPF LIFE. Regardless, I will still have excess money which will soon sit in my CPF-OA earning only 2.5%, as opposed to 4% previously in CPF-SA.

Me: I hear you. But there are ways around this issue. Let me demonstrate.

Many tuned in to watch the Singapore Budget, and many paid close attention to ‘goodies’ to be handed out. The Finance Minister, in delivering the 2024 Budget on 16 February 2024, did not disappoint. The CDC vouchers and various rebates will help people cope with the effects of inflation in the short term.

However, there was a change that caused many to rethink their current retirement planning strategy. It was announced that for CPF members who are 55 and above, the CPF-SA account will be closed as part of a move to ‘rationalise’ Singapore’s social security system. Money from the CPF-SA account will be transferred to the Retirement Account (or RA, created when a CPF member turns 55), up to the Full Retirement Sum (FRS), and any balance will be added into the Ordinary Account when the member reaches age 55.

Now, What Does This Mean For People Who Are Above Age 55, And Who Have Balances In Their CPF-SA Which Will Soon Be Closed?

For many years, Singaporeans have relied on the CPF system to finance their housing, medical, and retirement needs. The CPF-SA has long been a pillar in helping Singaporeans, especially those with significant balances, to earn 4% interest every year, without the CPF member taking on investment risks. That tool will now be taken away and the CPF member will find that the money he has in CPF-SA, earning 4% originally, yielding 1.5% lower interest when it gets transferred to CPF-OA. The CPF member does have the option of topping up the RA, to obtain better payout from CPF LIFE at the age of 65. The government is well within its right to make changes to the CPF Scheme. To some CPF members, this is a policy risk that has materialised.

For those with very minimal or no CPF-SA balance after age 55, this move announced will have limited impact. For those who have turned age 55 and have CPF-SA monies, and who want to rely on interest of 4% or more to accumulate retirement income, this change has enormous consequences. The goalposts have been moved; the onus of generating returns greater than 2.5% per annum on CPF funds, has now been shifted from the government to the CPF member. This is the new reality.

So, What Can A Person Who Has Turned Age 55 And Who Has Significant Balances In CPF-SA, Do?

I have laid out three options, depending on the profile of the person.

Let us explore Option 3, as I have promised my friend. At the core of it, CPF monies, especially those in CPF-SA, are meant for retirement purposes. The CPF-SA is a nest egg. We want the resources in there to be in safe hands, and in instruments that are non-risky, especially when we become ‘young seniors’ and beyond. The runway becomes shorter as we age, and hence, one solution we can explore to manage this announcement by the government, is to put money in insurance solutions.

Let me illustrate here using a policy from a very well-known insurer, using the example of someone who turns 55 today, and someone who turns 60 today.

*Bonuses are based on 4.25% participating fund performance

As you can see, in both cases, it is possible to outperform the CPF-OA interest rate, regardless of whether he has just turned 55, or 60. The yield for both cases, are very close to the CPF-SA interest. By putting money into such policies, he will also retain a large degree of autonomy; he can surrender one day and get his money back, should he desire. There’s also the ability to structure it with retirement and other purposes, for example legacy, in mind.

Download our Guide to Understanding What Insurance Solutions Can Help Beat CPF-OA Returns here to help you get started.

Of course, CPF members aged 55 and above also have the option of withdrawing the money from CPF-OA to invest in financial markets or safer instruments such as Treasury bills. The former does entail investment risks and requires heavy lifting in terms of monitoring. While Treasury bills do good give returns at this point of time, at close to CPF-SA rates, there is a huge reinvestment risk looming with global interest rates set to decline sometime this year, which will likely affect returns from Treasury bills.

Conclusion

The announcement of the closure of the CPF-SA may feel like a “knock down”, to use a boxing term, to CPF members aged 55 and above. It also feels like one to those younger than aged 55 who may want to leverage CPF-SA as a source of retirement income. With this change, CPF members need to own their financial decisions and be proactive here. It is not a KO (knock out) as yet, providing they can get up before the count of 10, and throw some effective punches of their own. One punch they can deliver, is leveraging insurance solutions.

Article by Leon Loh
Email: leon.loh@gen.com.sg

The writer is a financial consultant representing GEN Financial Advisory Pte Ltd

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2024-03-05T10:33:42+08:00
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