Different minimum sums and flexible withdrawals up ahead

Singapore

SIGNIFICANT changes are in store for Singapore's Central Provident Fund (CPF) to allow people with higher lifestyle needs to receive bigger payouts from their pensions, while giving the flexibility to withdraw a small lump sum upon retirement.

The CPF Advisory Panel, headed by National University of Singapore (NUS) president Tan Chorh Chuan, shared at a press conference on Wednesday a list of nine recommendations that was submitted to the government.

In response, Manpower Minister Tan Chuan-Jin said that the government has accepted the proposals, which he called "balanced and constructive". He added that the government would provide details on the CPF changes at the Budget and Committee of Supply parliamentary debates.

A key proposal is the introduction of different retirement sums for different needs that people can commit to at age 55. Instead of a single minimum sum requirement, there are now three: a "basic retirement sum" of S$80,500, the old minimum sum of S$161,000 now renamed the "full retirement sum", and an "enhanced retirement sum" of S$241,500.

CPF will present these numbers in a smaller, more digestible form: instead of big sums, people will be encouraged to think of them as lifelong payment streams ranging from S$650 to S$1,900 a month.

The current minimum sum scheme is badly understood, said Prof Tan. "So it's very important for us to try to reframe it, so members, Singaporeans can understand it more intuitively."

Currently, CPF members commit a lump-sum premium of S$161,000 at age 55 to buy into the CPF Life annuity scheme, which pays them a monthly sum of S$1,200 to S$1,300 from age 65, for as long as they live.

With the change, people can now choose between three different types of monthly payouts corresponding to the three retirement sums: A basic amount of S$650 to S$700; the current level of S$1,200 to S$1,300; and as much as S$1,750 to S$1,900.

Financial planners praised the higher payout option, as they noted how the CPF retirement account offers a commercially unbeatable interest rate of 4 to 5 per cent a year.

Prime Minister Lee Hsien Loong, speaking to the Singapore media in Berlin on Wednesday at the end of his four-day official visit to Germany, similarly noted that a number of people leave their money in their CPF "instead of withdrawing it all when it comes to their retirement age".

"They don't get a lot of publicity, they don't jump around at Hong Lim (Park), but they quietly know it's a good deal," he said.

To address rising living costs and higher expectations, the panel proposed a 3 per cent increase a year to the basic retirement sum needed, currently at S$80,500 in 2016. This will increase accordingly each year from 2017 to 2020. The increase will apply to each subsequent group of people turning 55 that year.

The 3 per cent figure takes into account historical long-term inflation rates of close to 2 per cent, and the 5 per cent average rise in lower-middle retiree household expenses.

Planning five years ahead till 2020 means that future groups of retirees will be given advance notice on how much their required basic sum will rise by. A review will take place every five years, in line with the five-year cycle for the household expenditure survey.

CPF came under public scrutiny in mid-2014, after a scheduled increase in the designated minimum sum for retirement needs from S$148,000 to S$155,000.

People wondered if they will have enough to meet the sum. Others clamoured for the option to withdraw a lump sum of their hard-earned money upon retirement, instead of having money locked up to buy an annuity.

Mr Lee announced the setting up of the CPF Advisory Panel at last year's National Day Rally in August. At the rally, he suggested that up to 20 per cent of CPF savings can be withdrawn upon retirement.

The latest proposals provide that slight concession on the withdrawal front to those who urgently need cash when they retire.

The panel proposed an option for members who turn 55 from 2013 or later to withdraw up to 20 per cent of their Retirement Account savings at their "payout eligibility age", which will be age 65 from 2018 onwards. This 20 per cent limit includes the S$5,000 that can now be unconditionally withdrawn from age 55.

But the panel cautioned that this translates to smaller monthly payouts. It suggested that the government provide incentives to encourage CPF members, especially those with low balances, to leave their retirement savings in the CPF if there is no urgent need to make a withdrawal.

Meanwhile, the panel made a cosmetic tweak to its policies regarding withdrawals at age 55.

Currently, people's Ordinary Account, Special Account, and Medisave Account monies in excess of the Medisave minimum sum will be combined into a Retirement Account when they turn 55. The combined pool of monies will be used to meet the minimum sum requirement of S$161,000, which will be used to pay for the CPF Life annuity scheme.

However, regardless of whether they have enough in their Retirement Account to meet the minimum sum requirement or not, people can choose to pledge their property for up to S$80,500. Whatever excess cash can then be withdrawn.

Essentially, this means most people with fully-paid flats can withdraw excess cash above the first S$80,500 in their Retirement Accounts.

However, many people did not understand what a property pledge means, Prof Tan said. Pledging does not affect the ownership of one's property. It means that when a person sells his property, the amount pledged will go back to his CPF accounts. Some thought it entailed taking on another mortgage, Prof Tan said. As a result, not many people chose to pledge their properties.

The panel thus proposed, essentially, to do away with the pledging requirement for people who wanted to withdraw money above the first S$80,500.

This can be done administratively because CPF charges, the amount withdrawn from CPF savings used to pay for property, already serve the purpose of the property pledge. People have to return the charges to their CPF savings upon a property sale. Most people have CPF charges as they used CPF to pay for their homes. Currently, CPF charges can be used to top up a minimum sum shortfall, but cannot be used to let people withdraw cash. With the proposed change, the process of withdrawing amounts in excess of the first S$80,500 in their Retirement Accounts - the basic retirement sum - is thus simplified.

Yet, to so clearly offer the choice of a basic retirement lifestyle at age 55, along with the extra flexibility of the 20 per cent withdrawals at age 65, comes with risks, said observers.

"People who need the funding, the lower income group, will probably utilise the flexibility to the full length. And then at the later stage of their lives, they'll have even more challenges. We have to be prepared for that," said Tokio Marine Life Insurance Singapore CEO Lance Tay.

Another change proposed by the panel would help both the poor and the well-off build up their retirement savings.

Those who wish to get a higher lifelong monthly payout can now choose to defer their payout start age from 65 to 70. For every year deferred, the monthly payouts would permanently go up by 6-7 per cent. This is a feature common to other retirement systems around the world, said panel member and actuary Colin Pakshong.

This means that someone who has committed to a basic retirement sum of S$80,500 at age 55, with its corresponding payout of S$680 at age 65, will see that payout rise to S$900 if she opts only to receive payouts from age 70.

This allows those with lower CPF balances, who can still work to support themselves till they turn 70, a chance to get better payouts, Prof Tan noted.

The panel added that it strongly supports the government's move to raise the CPF contribution rates for older workers. It noted that the government has committed to equalising contribution rates for those aged above 50 to 55 to those enjoyed by younger workers.

The 13-member panel met more than 400 Singaporeans at focus group discussions held between last November and January this year, which helped shape its various proposals.

It will be submitting the second part of its recommendations, which will focus on inflation-adjusted CPF payouts and investment opportunities, by mid-2015.

At Wednesday's press conference, the panel discussed a number of issues and tradeoffs.

The basic payout of S$650 to S$700 a month, and the corresponding basic retirement sum of S$80,500, was set at a level that most people can meet, said Prof Tan. The monthly payout is the average amount that a lower middle-class retiree spends a month. Meanwhile, the enhanced retirement sum was put in place with future cohorts in mind, Prof Tan said.

Based on data for active CPF members turning 55 in 2013, about 55 per cent can meet their basic retirement sum requirement. Meanwhile, 35 per cent can meet the "full retirement sum" requirement - the current minimum sum. And 21 per cent can meet the enhanced retirement sum requirement.

Prof Tan urged CPF members to think about their retirement needs much earlier, when they first start working.

"The basic retirement sum, the basic payout, these are useful signposts that will probably help members to think about what they may need in retirement and what role CPF can play."

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