Understanding the CPF LIFE | TheFinLens

December 21, 2019
December 21, 2019 TheFinLens

Understanding the CPF LIFE | TheFinLens

Before going ahead with the CPF LIFE it is better to get a clear understanding of what the CPF is. This is a mandatory savings scheme, which is for social security and funded by the different contributions by the employees and the employers. This is considered to be an important pillar of the social security scheme in Singapore and serves in meeting the different requirements of housing, healthcare and retirement. The government helps in supplementing the savings of the CPF of the workers with lower wages with different schemes like top-ups to Medisave and Workforce for senior citizens.

Difference between the CPF LIFE Standard and the CPF LIFE Basic Plan:

The CPF LIFE Standard plan provides a monthly payout of a higher level while leaving a bequest which is lower. This is a default plan. The Basic plan, on the other hand, offers a monthly payout which is lower but tends to leave a higher bequest.

The best way to choose between both these plans is analyze your requirement.

How much monthly payouts you receive:

Understanding the monthly payouts in detail can help you make a right choice of a specific plan.

This CPF LIFE plan is applicable to all the Permanent residents of Singapore and also the Singaporeans. On the 55th birthday of an individual, a Retirement account is created. The savings from the Special Account and the Ordinary Account and the total Retirement Sum is transferred into this account.

The retirement sum provides the monthly payouts from the eligibility age of payout. This is 65 years for those born in the year 1954 or even later. You can make a choice of the CPF LIFE plan in order to receive the payouts anytime between the age of 65 and 70. Those who do not choose the LIFE plan by 70 years of age are placed automatically on the default plan, which is, CPF LIFE Standard Plan.

You can choose between the Basic and the Escalating plan in accordance to your specific requirements after retirement. The Basic plan provide with monthly payouts on the lower side, which is positive for the beneficiaries as they get more of your savings.

The Escalating plans of the CPF LIFE provide a low payout in the initial stages but this tends to rise by 2%every year. This helps you tackle the rising living cost.

The amount you receive with the CPF LIFE plan depends totally on the amount of the contributions. This can be from voluntary contributions or even the salary. Besides this, there are other factors which determine the amount you receive as monthly payouts.

  • Whether you choose the Standard Plan, Basic Plan or the Escalating Plan.
  • Whether you have saved the BRS (Basic retirement sum), FRS (Full Retirement Sum), or the ERS (Enhancement Retirement sum)
  • Whether you start the monthly payouts of the CPF LIFE between the age of 65 and 70 years.

If you are on the Basic plan, you receive the CPF LIFE monthly payout which is higher by 34.3% by deferring the starting age from 65 years to 70 years. On an average, this works out to nearly 6.1% higher for every year deferred.

On the Standard Plan, you receive a monthly payout on the CPF LIFE which is nearly 34.5% higher is the age is deferred from 65 years to 70 years.

On the Escalating Plan, you receive the monthly payouts of the CPF LIFE which is 38.0% higher if you defer the starting age from 65 years to 70 years. This works out nearly 6.7% higher.

Bequests and Cumulative Payouts:

The CPF LIFE monthly payouts are impacted with the deferring of the age, as mentioned. This also impacts the cumulative payouts received over a period of time and the bequests left behind.

If you defer your age to 70 years but live only till you are 75 years old, you enjoy less of the funds saved. This can get better only if you live till 85 years or more. Even if you live till this age, you do not enjoy the funds much if you are on the Escalating Plan.

Deferring from the age of 65 years to 70 years for the payouts works well only if you intend leaving a good bequest. You can also combine the bequests with the cumulative payouts before you decide on the specific plan you want to choose.

There are chances of the results altering if you are unable to save up to the FRS (Full Retirement Sum).

Tips to increase the Monthly Payouts of the CPF LIFE:

  • It is advisable not to withdraw the $5,000 or any other sum which you are eligible for, at the age of 55 years.
  • No withdrawals to be made at the age of 65 years.
  • VC (Voluntary Contributions) made at an early age can help you enjoy the compounded returns effect.
  • Consider the topping up of the Retirement Sum (TURS) for contributing more to the CPF accounts and also benefit with the tax benefits.
  • Transferring the balances of the Ordinary Account to the Special Account periodically to earn an additional 1.5%in interest returns per annum.
  • Paying in cash for the housing needs so that the balances in the CPF Account can grow, or choose to transfer to the Special Account.

In case you are earning an income that can sustain you beyond 65 years, defer the monthly payouts of the CPF. This can provide you with monthly payouts which are higher when you stop working.

Choosing to stay in the Retirement Sum Scheme you can get payouts for around 20 years, or you can get these payouts for lifetime if you enroll in CPF LIFE.

Reasons for not increasing the Monthly Payouts of the CPF LIFE:

  • The money transferred to the Retirement account will be ‘stucked’ for at least 10 years from 55 to 65 and it is a one-way traffic. If you do have ways to increase this payout through alternatives financial instruments , you can consider to explore other options which can be more liquid.

For example, some of our cpf members above 55 would choose to explore a couple of our deposits instruments which are capital protected and can attain above the interest of the Retirement account while still attaining more benefits and needs for their future (be it for retirement payouts, higher interest, liquidity, etc). Feel free to leave a message below for me to share with you my expertise in optimizing your Retirement and Ordinary/Special account for better interest.

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