THE Central Provident Fund (CPF) Special Account (SA) was closed on Jan 19 for about 1.4 million CPF members, nearly a year after the closure was announced in Budget 2024.
Over the past month, as Singaporeans above 55 years old prepare for this eventuality, I received many questions about what one should do with their CPF money, which will be transferred to their Ordinary Account (OA) from their SA.
At the same time, I have noticed financial institutions and their representatives encouraging CPF members to invest their OA money to get “better returns”. I hope to provide some clarity on what you should do with your hard-earned CPF money.
When CPF members turn 55, the amount up to the Full Retirement Sum (FRS) will be transferred to their Retirement Account (RA) from their SA first. If insufficient, the remaining shortfall will be funded from their OA funds.
Previously, if there was still excess money in their SA and OA after fulfilling the FRS, members could withdraw it any time they wanted, or leave it in the accounts to earn at least 4 or 2.5 per cent a year, respectively.
The money in the RA attracts interest rates of between 4 and 6 per cent per annum. When members turn 65, they can begin to receive CPF Life payouts to enjoy a lifelong income stream.
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In planning for retirement spending, expenses can be broadly categorised as expenses that are absolutely necessary, and ones that are discretionary. The accumulated capital for retirement can then be deployed into appropriate financial instruments to fund these expenses.
Where financially possible, one should also have a sum of money set aside as reserves for unexpected situations beyond the normal spending.
To fund essential expenses in retirement, we often recommend annuities as one of the instruments because it mitigates longevity risk, and also pays a reliable income regardless of market volatility.
Without a doubt, CPF Life is the best annuity in terms of annual payout per dollar of premium. CPF members typically use CPF Life as the annuity to fund a part or all of their essential expenses.
Alternatively, you can buy private insurance offerings with equivalent benefits to CPF Life. You may apply to be exempted from setting aside the retirement sum and withdraw all your CPF retirement savings for such options.
However, as can be seen in the accompanying comparison, it is quite difficult to find policies that are better than CPF Life these days.
Members with excess money in their SA and OA typically use it to fund their expenses from age 55 to 65, until payouts from CPF Life kick in. They may also leave it in their accounts as reserves, since the accounts offer attractive interest rates at almost no risks.
However, with the closure of the SA for members above age 55, excess money left in the SA will now be transferred to OA, earning 2.5 per cent instead of 4 per cent.
What one should do now will really depend on the original intention for their CPF money, assuming the SA was still open.
Original intentions for SA
One intention may be to keep funds in the SA and transfer to RA when one wants to start CPF Life payouts.
I know of some CPF members who would keep the excess cash in SA to earn 4 per cent. They would decide on a transfer up to the prevailing Enhanced Retirement Sum (ERS) when they want to draw down their CPF Life to get a higher payout.
If this is the case, you may now want to top up your RA up to ERS (currently S$426,000). However, you may want to consider topping up your RA first with cash from your savings accounts before using money in your OA, because the OA earns a higher interest than savings accounts.
A second intention is to use the SA funds for immediate drawdown from age 55 until payouts from CPF Life start.
If this was your original intention, I suggest keeping the funds in your OA and not investing it. At a guaranteed 2.5 per cent per annum, with near-zero risk and full liquidity, it is as good as it gets.
Yes, perhaps you can invest in Singapore Government Securities Treasury bills and earn a slightly higher interest rate. But you probably will not be able to get this kind of yield for too long.
A third intention is to treat the SA as a reserve fund for emergency use
Since you may not need this money so soon, you potentially have a longer time horizon and a higher ability to take risk. You can consider keeping part of your money in OA to have liquidity in case of emergency.
But you can also invest another portion into, say, a globally diversified portfolio of equities and bonds, which should beat the 2.5 or even 4 per cent rate. But you need to have a time horizon of at least eight years.
Personally, I am not too excited about getting clients to invest their CPF money unless they absolutely need to do so. And if you are being persuaded to do so, I would sincerely ask you to pause and consider the above points before making the decision.
It is, after all, your hard-earned money.
The writer is CEO, Providend Ltd, South-east Asia’s first fee-only comprehensive wealth advisory firm
