How to Choosing CPF LIFE Plan | TheFinLens

December 28, 2019 TheFinLens

How to Choosing CPF LIFE Plan | TheFinLens

Retirement plans are definitely an essential requirement for everyone. The sooner you start planning on this the better benefits you are offered. Contributing to the CPF account is compulsory in Singapore. This helps not only the retirement period but can also help you in building a home and cater to the different expenses like the medical expense.

CPF LIFE plan is CPF Lifelong income for the elderly, which is administered by the government of Singapore. This is a scheme of life annuity providing the citizens of Singapore and the PR (Permanent residents), a monthly payout after retirement. This works as a post-retirement security. The payouts are given after you reach the age of 65 till the time you live. The retirement sum set aside in a specific Retirement account is used for this CPF LIFE.

How CPF LIFE Works:

A Retirement Account (RA) is set up on your birthday when you reach 55 years. The savings from the SA (Special Account) and OA (Ordinary account) is transferred to the RA to form the retirement sum.

This retirement sum is utilized to buy the CPF LIFE plan that is able to provide monthly payouts lifelong from the eligibility age of the payout, which is 65 years at present. The retirement sum that is deducted as the annuity premium depends on the type of plan you have chosen. This is informed to you on the issuance of the CPF LIFE plan. The interest which is earned on the premium is utilized for paying out the payout on a monthly basis to the surviving members.

You can also use the CPF LIFE Estimator Calculator to determine which schemes you prefer to go for: See below) Source: Here

cpf life basic plan

CPF LIFE Basic Plan:

The monthly payouts with the Basic plan of the CPF LIFE are on the lower side but tend to leave a greater bequest for your family when you pass off. A specific part of the RA (Retirement Account) is deducted for the premium of the CPF LIFE Basic. This is anywhere between 10 and 20%.  The final amount depends on your gender and age. The deducted premium is transferred into the Lifelong Income fund and the balance of the RA savings stay in the RA Account. The RA savings and the premium earn interest which is paid into the RA and Lifelong income fund.

The monthly payouts are first given from the RA savings till the age of 90 years. From the age of 90 years, you are given payouts on a monthly basis from the Lifelong income fund and this continues for as long as you are alive.

The payouts for the Basic plan are not consistent as there is a decrease in the payouts due to the interest which is paid in your RA reducing.

Payouts can be adjusted for different changes in interest on the long-term basis or the age factor. These adjustments are gradual and small.

I have also worked out the Internal rate of return of CPF LIFE based on an age 55(as of 29th Dec 2019) and taking the payouts till age 85 (See below):

It is around 3.90%p.a (based on the lower off) and around 4.39%p.a (based on the higher off)

Note: The below is based on “Bequest by age 85”

cpf life plan

CPF LIFE Standard Plan:

With the CPF LIFE Standard, the annuity premium is taken from the savings in the RA (Retirement Account) at the time of the policy issuance. The premiums which are deducted are paid into the Lifelong Income Fund.

All the interest which is earned on the premiums, even the extra interest, is pooled into the Lifelong income Fund and factored into the payouts on a monthly basis for the CPF LIFE plan. The monthly payout is stable from Lifelong income fund from the start age of the payout for as long as you are alive.

The payouts can be adjusted to the account for changes on a long-term basis in life expectancy or the interest.

I have also worked out the Internal rate of return of CPF LIFE based on an age 55(as of 29th Dec 2019) and taking the payouts till age 85 (See below):

It is around 3.42%p.a (based on the lower off) and around 3.99%p.a (based on the higher off)

Note: The below is based on “Bequest by age 85”

what is cpf life

CPF LIFE Escalating Plan:

When joining the Escalating plan of the CPF LIFE, you need to know that the deductions are done from the savings in the RA (Retirement Account) as the premium and this is done at the time of the policy issuance. These premiums are put into the Lifelong Income fund.

This Escalating Plan of the CPF LIFE has monthly payouts which are low initially but tend to increase by nearly 2% every year. This increase will be done in the specific month when you received the initial payout every year.

I have also worked out the Internal rate of return of CPF LIFE based on an age 55(as of 29th Dec 2019) and taking the payouts till age 85 (See below):

It is around 2.08%p.a (based on the lower off) and around 2.68%p.a (based on the higher off)

Note: The below is based on “Bequest by age 85”

what is cpf life standard plan

Deciding on a Specific Plan:

Though it is easier to follow what the rest are doing, but any financial decision needs to be taken only after you consider your personal financial requirements and needs. You have the option of seeking help from a reputed and qualified financial advisor before making a choice of a specific CPF LIFE Plan.

The Escalating plan of the CPF LIFE can work well for you if you either have some additional sources of income or intend to continue working even after the retirement age. This is because you will be able to manage with the low monthly payouts offered by this plan. The 2% increase every year can help you tackle the potential inflation in the coming years.

The differences in the 3 plans are the monthly payouts and the size of the bequest left for your loved ones. The Standard plan offers a decent monthly payout but funds left for your loved ones is not much.  The Basic plan, on the other hand, offers less of monthly payouts but you can leave a hefty sum for your loved ones. The Escalating plan works out a balance between these two.

However, based on “Bequest”options with the calculations above, it seems like the “CPF LIFE Basic Plan” seem to be the most worthwhile to go for , be it in terms of payout or in terms of leaving behind some amount for your love ones. This is still however, still subjective to one’s retirement needs.

Working of the CPF LIFE Plans:

At the age of 55, the funds from the SA and the OA of the CPF are transferred to the RA (Retirement Account) of the CPF to ensure the FRS (Full Retirement Sum) of the CPF. Upon pledging your property you need to transfer only the Basic retirement Sum (BRS). For any increase in the payout you need to contribute a sum which is equal to the BRS and not more. This is the ERS (Enhancement retirement Sum). This offers a payout which is almost constant. Considering all the pros and cons of the three CPF LIFE Plans , the final decision of a specific plan totally depends on your requirement and needs. You may wish to consult us for advice on other financial planning and instruments available that can also gain higher returns that CPF LIFE.

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