How CPF changes in Budget 2024 impact retirement planning

FOR years, CPF members were able to “shield” or prevent the money in their CPF Special Account (SA) from being transferred to their Retirement Account – by investing the money in excess of the first S$40,000 in their SA just before they turn 55.

They subsequently sell the investment and move the proceeds back to their SA after their 55th birthday to enjoy the minimum 4 per cent a year interest, and the option to withdraw at anytime they want as long as they have their cohort’s Full Retirement Sum (FRS) in their Retirement Account (RA).

But this so-called loophole was effectively plugged when Finance Minister Lawrence Wong announced last Friday (Feb 16) during Budget 2024 that the SA will be closed after CPF members turn 55.

With this change, once CPF members turn 55, their SA money (and if insufficient to meet the FRS, the Ordinary Account (OA) money as well) will be transferred to their RA. If there are still balances in their SA, they will be transferred to the OA, which currently earns at least 2.5 per cent a year.

With the closure of the SA, future working contributions will go into the OA, Medisave Account (MA) and RA. If the RA has reached FRS, the excess savings will be channelled to OA instead.

To help Singaporeans have retirement adequacy, it was also announced that they can now top up their RA by up to four times of the Basic Retirement Sum (BRS), instead of just three times. This will give retirees a higher monthly CPF LIFE payout from age 65.

Why the change

I had long expected this change, so when it was announced, I did not think it would cause a stir.

I could not have been more wrong.

Minutes after the announcement, a finance chatgroup with more than 30,000 people exploded with angry messages. While I acknowledge the emotions, I believe this move is right.

When I participated in the CPF Advisory Panel 10 years ago, we had sized the BRS at age 55 to allow a retiree in a lower-middle income household to have a stable, lifelong income stream that can support a basic level of retirement expenses when the member turns 65.

This took into account that most retirees own their homes and do not need to pay rent.

We have always been more concerned with the lower income group because they have fewer resources to depend on for retirement.

That is why the government has put in place other policies to support them to at least reach their BRS.

The RA currently attracts 6 per cent in interest for the first S$30,000, 5 per cent for the next S$30,000, and 4 per cent for the remaining balance.

You will notice that the additional interest is given only for the first S$60,000 so that it mainly benefits those with fewer resources.

So, allowing balances in SA to earn 4 per cent a year with liquidity after age 55 really only benefits the more affluent.

Furthermore, getting 4 per cent with guaranteed capital and liquidity is a free lunch that is not sustainable.

Planning for retirement

In every retiree’s spending plan, there should always be an annuity plan to hedge against longevity risk.

The CPF Life is currently the best overall annuity plan in Singapore. In Providend, we use CPF Life as one of the “instruments” to meet essential expenses – the expenses that a retiree cannot avoid during retirement.

One of the problems we face is that there is a limit to how much CPF Life one can subscribe for. As such, we had to find investment-grade bonds for our clients to supplement CPF Life to cover their essential expenses.

Now that we can top up our RA, clients can now “buy” more CPF Life and enjoy a higher payout from 65, and this makes the income stream more reliable.

So, review your own spending plan and decide if you would like to use your OA (or cash) to top up your RA up to four times the BRS.

But do remember that since 2008, the interest rate for SA, MA and RA is pegged to the average yield of the 10-year Singapore Government Securities plus 1 per cent.

Currently, it is guaranteed at a minimum of 4 per cent. This guarantee is reviewed regularly and can be removed. Nothing can be certain in this world, not even our CPF returns.

Next, we deal with the remaining CPF balances in your OA. There are generally three ways the OA and SA balances are used after 55.

Cash for immediate drawdown

When the SA closes early next year for those above 55, they will be getting 1.5 per cent a year less interest, because the money in SA will now be transferred to the OA.

So, you either will have to spend less or see the money run down faster.

To illustrate, prior to this change: If you have S$200,000 in your SA after setting aside the FRS in your RA, if you want to withdraw S$3,000 per month adjusting for 3 per cent annual inflation, your SA balance will last you about 5.7 years.

But with the change, your SA will be closed; the S$200,000 will be transferred to your OA earning 2.5 per cent. This S$200,000 will last you about 5.5 years instead. If you have other resources, mitigating a shortfall of nearly three months should not be a problem at all.

Otherwise, if you still want your money to last 5.7 years, just spend about S$100 less each month.

You may also consider dividing the S$200,000 into three pots or buckets.

The first pot can remain in the OA.

The second pot can be invested, say a two-year single-premium endowment plan.

The third can be in investment-grade bonds. Both the endowment and bonds are currently giving higher returns than the OA.

Cash for emergencies and to build capital

Since you might not need this money so soon, you potentially have a longer time horizon and thus have a greater ability to take risk. You can consider keeping part of your money in OA to have liquidity in case of an emergency.

But consider investing the other portion into, say, a globally diversified portfolio of 60 per cent equities and 40 per cent bonds, which should beat the 2.5 or 4 per cent interest rates comfortably. But you need to stay invested for at least eight years.

So far, we have been discussing how to make better and more rational financial decisions.

Remember, however, this is just an enabler. If a seemingly “right” financial decision does not give you peace of mind, then it might not be right.

The best financial decision is not one that maximises your investment returns, but one that lets you live at peace with yourself and the world.

Over the next few weeks or even months, you may be shown various product options to invest your CPF money.

Please do not make product decisions without considering your life and wealth plan.

The writer is chief executive officer, Providend, South-east Asia’s first fee-only comprehensive wealth advisory firm