Voluntary Contribution to CPF Special or Retirement Account - Not As Easy Emotionally As I Believed

Save for your retirement and save on taxes - only available in Singapore.inc.

Sometime in June this year, I blogged about how anyone in similar situation as mine can instantly get 7.53% capital gain and a 5.38% yield on capital per annum [link]. It was easy going through the fancy numbers and writing about it, but to actually put the plan to action? Tough. No matter how impressive the plan looks on paper, the idea of locking up my money for the next 15 years and never getting them back in full doesn't really sit well on me emotionally. It feels like I'm "giving away" my money, and who does that?

But as much as I hated that feeling of parting with my hard-saved money, I knew I had to stick to my plan if I am serious about securing my financial future. So I bit my tongue and took the plunge, contributing $200 to my mum's SA a few days later. Yes, a grand total of $200. This is the first time I am using the e-cashier platform on the CPF website; it's only prudent to test it out first. Expectantly, the money appeared in my mum's CPF account a few days later.

Then, here comes the hard bit. I intended to contribute a total of $7000 to my mum's CPF to maximize my tax benefits, which left me with $6800 more to go! Okay well, to some of the higher-income earners out there, maybe this does not sound much to you, but it's sizable and significant to me. You know how sometimes people can conveniently leave a $2 note in a corner of their house and forget about it? $6800 is not that to me. $6800 is an amount I will safe-keep in a strongbox made of 10 cm thick fire-resistant alloy that's hidden in the most concealed corner of my house and drilled to the wall with a pair of 10 cm long screws. Yes, it's exactly that, and now you can see how difficult it is for me to use that money to buy a golden egg that will only hatch 15 years year. In fact, it's so difficult that I actually put the plan on hold for the next 1 month.

In that 1 month, I kept looking for reasons not to follow through with the plan. I could not find one compelling enough.

So again, I bit my tongue for the second time and made a contribution of $2800. The money appeared where it should a few days later.

With $4000 left to go, I sat on the plan yet again. I sat on it so much that I nearly developed piles. Eventually, I got so sick of sitting and the risk of actually developing piles got so high that I went back to biting my now-swollen tongue instead and made my final contribution of $4000.

And now I can rest and prepare myself for the next round of tongue-biting and piles-developing exercise. I hope it gets easier.

CPF Life - Basic or Standard Plan? (Part 1)

Do you know that there are two different CPF LIFE Plans that you can choose from - LIFE Standard Plan and LIFE Basic Plan? The former gives you a higher monthly payout but a lower bequest for your beneficiaries, while the latter gives you a lower monthly payout but leaves more behind for your loved ones. Below is an illustration taken from CPF website:

Figure 1: LIFE Standard Plan gives you higher monthly payouts, but leaves behind lower amount of bequests for your beneficiaries. The opposite is true for LIFE Basic Plan.

While the illustration is factually correct, it leaves out tremendous amount of information essential for decision-making. There are many more considerations than just the monthly payout and the size of the bequest. Even if these are the only two factors, we still need to get a better sensing of the relevant figures to make more informed decisions.

This Straits Times article published on the 23 Aug 15 provided some useless (yes, this is not a typo) figures for comparison of the two plans [link]. It's useless because of one important change - members only need to choose their LIFE Plan when they wish to start their monthly payout. This change applies to CPF members who turned 55 on or after 1 Jul 15. 

Figure 2: Screenshot of the Straits Times article on the comparison of the two CPF LIFE Plans available. 

The article was published after the change. The author also acknowledged this change in the beginning of the article, so he/she must be aware of it already. However, this is where the major discrepancy is: the author did not factor this change into his/her subsequent analyses.

As enclosed within the purple box in Figure 2 above, the figures in the article are supposed to illustrate the monthly payout and bequest for a male who turned 55 on July 1. However, on closer look, the figures totally ignore the change mentioned earlier! For a male who turned 55 on July 1, 2015, he only needs to make his choice when he wishes to start his monthly pay-out, which is when he turns 65 at the very earliest. This means that between 55 and 65, the money will stay in his Retirement Account (RA) to earn interest. The major giveaway is at age 65. If the member is to pass on at 65, just before he starts receiving his monthly payout, the bequest amount should be the same for both plans because the money in his RA has not yet been (or just been) used to pay for the CPF LIFE premium. This is clearly not the case for the illustration used by Straits Times. I think the author must have used the figure for someone who turned 55 before 1 Jul 2015. For this group of people, they have to make a choice at 55, which is also when the first deduction up to the Basic Retirement Sum of $80,500 is made. Figure 3 below explains this. The scenario provided by the Straits Times article is clearly not for those who turned 55 on 1 July 15.

Figure 3: Deductions of premiums for CPF LIFE Standard Plan for members who turn 55 before 1 Jul 2015.

For this group of people who turned 55 before 1 Jul 15, the interest earned on the money used to pay for the CPF LIFE premiums will not be refunded upon the death of the member. This means that the first deduction of up to $80,500 at age 55 will not earn "refundable" interest for the next ten years. This explains the lower bequest amount at 65 for the LIFE Standard Plan.

I am appalled by this piece of misinformation by our news publisher. With such a large reader base, such mistake can cause many readers to make the wrong choice. I almost gave the wrong advice to my dad! Luckily, I didn't take the numbers presented at face value, and went on to read up more on CPF website.

I urge all of you who have vested interest in the CPF LIFE to read up more on CPF websites to further your understanding, instead of relying solely on news publications. If Straits Times can make such a mistake, CPF can too, but we will have a stronger case to fight for justice if the mistake is made by the latter. 

For those turning 55 on or after 1 July 2015, Figure 4 below tells you how the premiums are being paid instead. This is taken from the CPF website. 

Figure 4: Screenshot from CPF website showing the difference in premium payments for the two different CPF LIFE Plans.

I first started out with this post hoping to do some analyses on the figures provided by the Straits Times. Now that we know they are not relevant anymore, I will have to try and derive some figures myself. I am quite sure I don't have all the information to calculate the figures accurately, but I hope to be able to make some guesstimates. 

That will have to be in the next post.

Meanwhile, I hope this post helps you to avoid making a false decision because of the misinformation provided by the Straits Times.