Thursday 22 February 2024

CPF latest policy changes (No more SA Shielding), so how?

This is a long post. Previously, I had shared about how my Special Account (SA) had reached Full Retirement Sum (FRS), the interest I received in CPF for 2023 and my CPF strategy. You can read more about them here:

1. My CPF Strategy - Reached Full Retirement Sum (FRS) of $198,800 in 2023
2. 2023 CPF Interest of $11,134.61 and top up CPF MA to the new BHS

In my first article, I wrote about the policy risk a few times and true enough CPF has made a huge changes in policy during Budget 2024 and it would be effective in 2025. Budget 2024 had the usual incentives and CPF tops as previous years. 

The huge changes are 

(i) Closure of Special Account (SA) for members aged 55 and above; and 
(ii) Raising of Enhanced Retirement Sum (ERS) to four times of Basic Retirement Sum (BRS)

These changes have huge impact. Let me explain below. 

The closure of SA in early 2025 will mean that for members aged 55 and above, their SA savings will be transferred to the Retirement Account (RA) up to the Full Retirement Sum (FRS), where they will continue to earn long-term interest rates. Any remaining SA savings will be transferred to your Ordinary Account (OA), where they remain withdrawable and will earn the short-term interest rate.

Before the age of 55, you will have the 3 accounts; Ordinary Account (OA), MediSave Account (MA) and Special Account (SA). 

At the age of 55 and after, RA will be created and the savings in SA (and OA) will be used to form up to FRS in your RA. Any excess in SA will be transferred to OA and SA will be closed. 

With the closure of SA for members aged 55 and above from early 2025, it means the SA shielding loophole has been closed. This impacts everyone, even those who had done SA shielding in the past, whether 1 month ago or 10 years ago. The current loophole allows some to withdraw their SA savings withdrawn on demand from age 55 while earning the 4%, which is the long-term interest rate. Effectively, this benefits those who have more savings in SA; i.e. those who are rich (aka more well to do). 

Hence, this is really to fall back to the intent of Central Provident Fund (CPF). "CPF is a key pillar of Singapore’s social security system". It is meant to helps= Singapore Citizens and Permanent Residents set aside funds to build a strong foundation for retirement. 

With this loophole closed, the intent will be that only savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate. After all, CPF is for the everyone and not to help the rich become richer. If the certain part of the mechanism needs to help a certain group, it would be to help the lesser privilege or those with minimal amount of CPF savings and with a small property (note, this group is different from those with minimal amount of  CPF savings with a big or has more than one properties). 

While I am sad that this loophole has been closed and that I am not able to benefit from it, I am glad that our government and civil servants are doing the right thing as I agree with the policy intent and principle behind this. There is no perfect system in the world, it is easy for everyone to ask why CPF had not foresee this loophole. What is important is that the system is being improved constantly and these improvements are aligned to the intent and objective.

What do those members with alot of CPF savings and want a higher payout upon retirement do? They  can voluntarily top up their Retirement Account to ERS, which is four times of BRS when they are 55 and above for even higher CPF monthly payouts in retirement. This is the reason why CPF is  raising the Enhanced Retirement Sum (ERS) to four times of Basic Retirement Sum (BRS).

Sounds good? Sounds like better than SA shielding? 

Let us go back to SA shielding. SA shielding allowed members to shield a amount of money and then realised them back to SA after RA has been formed. This amount that is put back into SA allows members to earn 4% interest and yet withdraw it on demand (i.e. anything, with no strings attached). To put things into perspective, this is even better than DBS Multiplier, UOB One or OCBC 360 accounts where you need to do certain actions to get high interest. In CPF SA, you do not need to do anything, just do that SA shielding once. 

In 2025, when the changes are implemented and you can voluntarily put in a big sum into RA, up to ERS and get 4% interest. However, you cannot withdraw this amount*.This amount is locked up until the age you select to start your CPF LIFE payout. Let me digress slightly to CPF Life..

At this payout age, your CPF LIFE premium is formed. CPF LIFE premium amount is the addition of your RA amount and compounded interest earned in RA account.

It is important to note your CPF Life monthly payout depends on the amount in your CPF LIFE premium. For example if you top up till ERS and choose start monthly payout at the age of 68, this monthly payout is from your own RA amount plus interest earned to date (your CPF LIFE premium) from 55 to 68 years old. So after your first month, CPF will deduct this payout amount from your CPF Life Premium and this balance amount is called CPF LIFE premium balance. 

So does your CPF LIFE premium earns interest? Yes, it does! But this interest may not go to your directly until your CPF LIFE premium is depleted. "The interest accumulated on your CPF LIFE premium, along with the premiums of other CPF LIFE members, ensures that you can continue receiving payouts no matter how long you live, even if your CPF LIFE premium balance is depleted." See image below. 


The concept of interest from all members' CPF LIFE premium being pooled together to ensure that members continue to receive payout even after their CPF LIFE premium has been depleted is really interesting. This ensures that Singaporeans are taken care of till the day they die. Really salute the team that came up with this.  

For those who think that the payouts will not be adjusted, please note that the payout may be adjusted. The payout is reviewed yearly to account for deviations in mortality experience and interest rate. Should there be adjustments, CPF will inform members. CPF shared that any changes are expected to be small and gradual.

There is another interesting thing to note, which is what happens if you pass away. 

"If you pass away before your CPF LIFE premium is depleted, your beneficiaries will always get back any remaining CPF LIFE premium that you have put into your plan.". 
It would mean that if you pass away after your CPF Life Premium is depleted, your beneficiaries get nothing from your CPF Life Premium. They will still get something from your OA and MA. 

I had wanted to share what I plan to do moving forward, but this post is way too long. I will post more about it in my next CPF post. 

These are my personal thoughts and based on my understanding of CPF mechanism. You will need to do your own due diligence and fact finding.

* technically you can pledge property or get back 20%, but lets not complicated things. For those who know what I mean, you are probably those already quite financial savvy. For the purpose of this post, I will not complicate things further. 

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