Ever since news broke that our friends across the causeway were allowed to withdraw up to RM$500 per month from Employees Provident Fund (EPF) during the current crisis, it was only a matter of time that folks started eyeing our own CPF for the very same reason – which isn’t always a case of right or wrong.
At times when the most important thing is to put food on the table, a little empathy is needed too. There are many considerations on different levels to this issue, and it appears that our government is far more willing to dig into the country’s reserves to help us, than to allow us to dig in our own reserves.
The policies governing the CPF system were written and refined over the years by people far smarter than me, and meant to prevent us from exploiting loopholes or mis-using the system. In their own words, CPF is the bedrock of our social security system. Because assurance in old age revolves around three key considerations: retirement, housing and healthcare needs. Oh wait, isn’t this exactly what Christopher Tan said? As a compulsory savings scheme, the CPF system is designed to help Singaporeans take care of these needs and support us in retirement.
Don’t complain to me about the system, because I’m just a blogger and I’m not here to save the world. I’m not noble like that. At the end of the day, I’m an engineer. I learn how the system works and use it to my advantage. If what I’m able to share with you will benefit you, then that’s great! Read on.
How it works
Now that we’re clear of the intent of the CPF system, that is to provide for retirement, housing and healthcare, what this means is that when all three criteria are taken care of, the system has done its job! Well, there is now a little leeway to maneuver such that we are able to allocate what we have in the CPF system and use it for someone else (related to us).
CPF is basically a silo-ed system, and it is very difficult to funnel money out of the system. The idea is to convert CPF money into an asset that allows for money to be “withdrawn” in cash. One common method – many people use CPF to buy property, rent it out and receive rental in cash.
Uncommon method — because it is not easy to fulfill the criteria — I transferred money from my CPF-OA into my mum’s CPF-RA. She is then able to withdraw money every month. Many people don’t know that that the transfer can be done, because the prerequisites are difficult to achieve.
Prerequisites to make the transfer
To do what I did, there are some prerequisites because like I said above, the system was designed to behave this way. How much of CPF-OA can be transferred to your parents? The amount transferable amount is the lower of :
- Total CPF Savings + Property Charge/Pledge – Full Retirement Sum ($181,000 for 2020) or
- Total CPF Savings – Basic Retirement Sum ($90,500 for 2020) or
- CPF OA
In a nutshell, the scheme will only allow folks who have enough for their own retirement to move money from their own CPF-OA to support their parents. CPF Board ain’t stupid. Another way to look at it :
- Source/Giver account : Combined CPF + HDB value in excess of Full Retirement Sum
- Source/Giver account : High CPF Ordinary Account value in excess of Basic Retirement Sum
If you find this confusing, don’t worry. You can ignore everything that I wrote above and log in to your CPF account. They have calculated the numbers specific to your situation and you’d be able to see it at one glance.
And we’re only looking at half the equation, that is the source CPF-OA account. We also have to look at the destination/recipient account to see what kind of impact it will make.
Who it will benefit
A quick assessment of the criteria would seem to imply that this will benefit an unique situation in particular : the CPF-poor parents with CPF-rich children. Pioneer Generation and Merdeka Generation seniors have contributed their lives to the prosperity of our nation. In the process, many have acquired their own property but may end up being asset-rich but cash/CPF poor. Housewives, in particular, would have very limited funds in their CPF accounts.
Children of that generation, like myself, may find ourselves in a better position and thus, able to support our parents monetarily in their golden years. Depending on how old your parents are, they will either be on the Retirement Sum Scheme or CPF LIFE scheme.
My parents were on Retirement Sum Scheme. To better illustrate the scenario, below is the profile of my mum.
- Current age : 71
- Payout age : 62
- Payout age + 20 years : 82
- CPF Retirement Account (RA) Pre-topup : est. $10,000
- Monthly payout (subsistence amount) : $297
- Estimated payout exhausted date : In 3 years time
I wrote to CPF board
Prior to doing the top-up, I wrote to CPF board to clarify some doubts.
Q : Since my folks are currently on CPF RSS, can they still join CPF LIFE? Any limitations?
A : CPF members can submit application anytime till one month before they turn 80. There is no minimum amount. ($60,000 is the amount for automatic placement into the scheme but interestingly, there is no minimum)
Q : How long will the process to join CPF LIFE take?
A : The application will be processed in the same month if it is received by the 25th of the month and the bank account provided is previously used for receiving payouts under the CPF Retirement Sum Scheme. The CPF LIFE monthly payouts via Inter-Bank GIRO are credited by the 4th working day (excluding weekends and public holidays) of each month.
Q : After the first transfer and application to join CPF LIFE, can I perform additional transfers into their CPF-RA accounts later? If yes, would their payouts be re-calibrated based on their new CPF-RA balances?
A : Yep, can continue to top up their Retirement Accounts (RA) with cash/CPF transfer, as long as they have not reached their topping-up limit. After receiving top-ups to their RA, they have two options:
(1) Purchase an additional annuity; or
— If they choose to purchase an additional annuity, the payout that they receive will last them for as long as they live.
(2) Stream out additional monies as Additional Monthly Payout (AMP).
— If they choose to have the monies streamed out to them as AMP, this additional stream of income will only last them till they reach the age of about 90 years old. The AMP is not part of CPF LIFE and this payment will stop when the money in the RA runs out.
(3) Well, a third option is to leave them untouched to generate interest to replenish depleted CPF-RA for perma payouts in the scenario of RSS or to maintain full bequest amount in the scenario of CPF LIFE. Just take note of the answer to the next question.
In the end
Being rational decision makers, we do have to confront the inevitable scenario. What happens when the recipient passes away?
For all CPF transfers, any remaining transferred monies will be returned to the givers’ originating CPF account(s) after the recipient passes away. The refund amount is capped at the principal top-up amount.
This means that while we can temporarily make use of our parents’ CPF-RA as high-interest accounts, we would not be able to benefit monetarily from it. Once again, remember the smart CPF guys.
What happens if I choose the CPF LIFE Basic plan?
What happens when one joins CPF LIFE Basic is different from Standard or Escalating plan. Word for word extracted from CPF official website :
When you join the CPF LIFE Basic Plan, a portion of your Retirement Account (RA) savings will be deducted for the annuity premium. This can range from 10% to 20%, from age 65 to 70. The actual percentage will depend on your age and gender.
We will inform you on the amount deducted when your policy is issued. The premium deducted will be paid into the Lifelong Income Fund. The rest of your RA savings will stay in your RA.
Both your premium and RA savings will continue to earn interest which will be paid to Lifelong Income Fund and RA respectively. You will receive monthly payouts first from your RA savings from your payout start age until one month before you reach 90 years old.
From 90 years old, you will continue to receive monthly payouts from the Lifelong Income Fund for as long as you live. As extra interest is earned on the combined balances in your CPF accounts, including premiums committed to CPF LIFE, up to $60,000, you will experience a gradual decrease in your monthly payouts due to the reduction in extra interest paid to your RA when these balances fall below $60,000. Hence, Basic Plan payouts are not level throughout.
As with all CPF LIFE plans, payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual. We will inform you two to three months before we make any adjustments to your monthly payouts.
What happened after
I am able to do this because I bought an affordable HDB apartment, I’m not averse to debt and max-ed out my loan duration, which resulted in a CPF-OA that is in good shape. Considering that the first $60k of CPF money can earn up to 6% interest, that HDB loan is turning out to be a good debt to keep.
Too long; didn’t read (TL;DR) : I transferred $40,000 from my CPF-OA into my mum’s CPF-RA. Then, I signed her up for CPF LIFE Basic plan.
- Monthly payout pre-topup : $297
- Monthly payout post-topup : $300 (gradual decrease over time)
- Estimated payout exhausted date : Never
In terms of the monthly payout amount, it has largely remained unchanged but instead of the money running out in 3 years, the payout would continue for a lifetime.
Coming back to the start of the post, if you find yourself in the situation to be able to make use of this option, a couple of hundred dollars a month is nothing to scoff at during times like these. Granted, the monthly withdrawal trickles slowly instead of being an out-right lump-sum that can be used. You would have to think carefully if this is the right move to make. Don’t forget about the monthly mortgage payment that needs to be paid.
If you ask me, this is nothing more than left-pocket vs right-pocket, virtual accounts in my budgets. My CPF-OA is therefore in my mum’s CPF-RA now and if the entire sum of money is exhausted, that’s great news. If it doesn’t, well .. it doesn’t. Whatever that belonged to my CPF-OA will magically re-appear inside when the time comes.
There is very little room for loopholes and exploitation for our CPF system. If you were expecting to find any, I apologize for the click-bait-ish blog post title. If by replicating what I’m doing, you are able to improve your current situation and assist with a little breathing room, I would be very happy to know that.
A quick plug for my StocksCafe Giveaway that is ending in a few days time. All you need to do it to input your email address 😉
Meanwhile, I’m working on my Blueprint to Financial Freedom that is an attempt to link up the most helpful posts out of the 400+ that I have posted in the last 7 years. Let me know via chat, comments or direct messages from any of the options below if there are stuff you want me to write about.