CPF 101: A very simple CPF guide for dummies
CPF – we hear it all the time, and most of us get by pretending to understand what it really means at social gatherings and dinner parties. For a majority of millennials, we may not even know what the individual letters stand for. We know it has something to do with retirement, but how does it help, really? Why is it so important, and why does it sound like vulgarity when you pronounce it really fast?
First of all, we’d like to applaud those of you reading this for taking the leap of faith towards understanding what CPF is. After reading this short guide, you’ll understand why this isn’t just a matter of concern for older people – and how it pays to know why!
1. What is CPF?
The CPF (Central Provident Fund) is basically a default and legally enforced piggy bank. Originally created as a social security system to help Singaporeans save up for retirement, it has now expanded to cover healthcare, homeownership, family protection, and even asset enhancement.
As mandated by the CPF board (with some exceptions), all employees and employers are required by law to make contributions to the employee’s CPF account every month, depending on the percentage of their salary. If you’d like, you can also voluntarily top up your CPF account using your own funds. Only Singaporeans and PR are required to contribute to CPF.
2. What happens to the money?
Photo Credit: CPF Board
Your CPF is divided into three accounts – the Ordinary Account (OA), Special Account (SA), and MediSave Account (MA). The money in your OA account can be used for housing, insurance, investment, and education, and your SA account provides for retirement-related needs and products. You can also use your MA to pay for relevant hospital expenses as well as medical insurance products.
Here are the current interest rates of the respective accounts (from 1 July 2020 to 30 September 2020):
OA: 2.5% per annum
SA: 4% per annum
MA: 4% per annum
Once you accumulate your first S$60,000 across all accounts (including S$20,000) in your OA, the interest rates on your CPF accounts will increase by an extra 1%. Hopefully this will encourage you to start saving up now!
3. Can I use the money in my CPF now?
You can in the future, but not now. Generally, the money in your CPF accounts cannot be touched with the exception of housing, healthcare, and insurance. This means that until you’re 55, you won’t be able to see some of this money. When you finally reach 55, a Retirement Account (RA) will be created for you, and savings from your SA and OA will be transferred to this RA.
Knowing that your money will be untouchable for a long time, it’s best to consider other forms of investments so you don’t just have to depend on your CPF.
4. Is my retirement set with CPF?
Unfortunately, there is no straightforward answer to this question as it really depends on your lifestyle, wants, and needs. While the CPF contributions may be sufficient for some in their later years, others may want to live a bit more lavishly. After all, we spend over 70% of our lives working hard, so it’s only fair to want to enjoy as much as we can once we retire.
One thing to keep in mind is inflation, as the prices of goods fluctuate with time and 1 dollar today may not be worth 1 dollar in 50 years. We don’t really know what’s going to happen in the future, so just don’t think so much and just remember to start saving ASAP!
5. What happens to my CPF after I pass on?
If you pass on, the remaining money in your CPF account will be given to your CPF nominees, depending on whether or not you have nominated anyone. Making a CPF nomination is not necessary, and a person without a will would have their assets automatically distributed in accordance with succession rules.
We will stress again that a will itself does not cover the distribution of your CPF savings after passing on; if you want to have your CPF monies to be distributed based on your preference instead of intestacy law, you will need to do a CPF nomination.
For more info, check out the CPF official site https://www.cpf.gov.sg/members