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The CPF is a critical element of retirement planning for Singaporean citizens and permanent residents and is managed by the Central Provident Fund Board (CPFB). Contributions to the CPF are made by both the employee and employer, with the goal of meeting future retirement needs. These contributions are allocated to three accounts: the Ordinary Account (OA), Special Account (SA), and MediSave Account. In this context, what is the CPF SA account and what is its purpose? This post will provide you with more information about the CPF Special Account and what you can do with it.
Understanding the CPF Special Account (SA)
Unlike the CPF OA, the CPF SA is a retirement account that restricts withdrawals until you have reached retirement age. Your contribution to this account varies with age, from 1.0% to 11.5% of your pay, and generates risk-free interest.
CPF Special Account (SA)’s Attractive Interest Rate
The CPF Special Account is known for its attractive interest rate, which is currently set at 4% per annum and can go up to 6% per annum under certain conditions. This interest rate is higher than that of the CPF Ordinary Account. The government reviews the interest rate every quarter and it is subject to change.
For those under 55 years old, you can earn up to 5% per annum on the first $60,000 of your combined CPF account balances, with a cap of $20,000 for the Ordinary Account. For those aged 55 and above, you can earn up to 6% per annum on the first $30,000 of your combined CPF balances, with a cap of $20,000 for the Ordinary Account, and then up to 5% per annum on the next $30,000.
It’s important to note that the current floor interest rate on the CPF SA is 4% per annum for both age groups. Compound interest is also a significant feature of the CPF SA, allowing your savings to grow at a faster rate. For instance, if you’re under 55 years old and working, every dollar you contribute to your SA is matched at $0.85 by your employer, resulting in a total contribution of $1.85.
This amount will accumulate exponentially higher interest than the original $1 you contributed on your own. Assuming you currently have $10,000 in your SA account, it would compound at a guaranteed interest rate of 4% for 20 years.
What Can You Do With CPF Special Account (SA)?
The CPF SA offers several important features, including a dependable return and steady retirement income. The government adjusts the CPF SA’s interest rate to account for inflation. Additionally, CPF Special Account savings are inaccessible until retirement age, making them a secure long-term investment. It is possible to increase CPF SA savings by transferring funds from the Ordinary Account or through voluntary contributions. For those with a balance of at least $40,000, CPF SA funds can be used for investments, subject to approval. Investment options are typically low to medium risk, such as government bonds and annuities.
You can use the CPF SA for wealth growth purposes, mainly with the (Government’s) intention for your retirement
For Your Retirement
Upon reaching 55 years of age, the Special Account (SA) and Ordinary Account (OA) are combined to create the Retirement Account (RA), which serves as the source of funds for either the CPF Life or CPF Retirement Scheme.
The CPF Life scheme offers three different payout tiers for members to choose from, each providing monthly payments for the entirety of one’s life.
The available options are contingent on the desired retirement income and whether the individual meets the minimum CPF requirement.
Individuals born after 1957 are automatically enrolled in the CPF Retirement Scheme – CPF Life, an enhanced version of the CPF Retirement Scheme. Those who do not qualify automatically have the option to opt-in.
As CPF funds are only accessible at age 55 (with payouts commencing even later), the CPF Retirement Scheme and CPF Life provide opportunities to invest your Special Account and Ordinary Account savings in various investments to maximize your retirement savings.
Prior to age 55, you may opt to invest your CPF SA funds in the CPF Investment Scheme – SA, which comes with risks, in an effort to grow your money at a faster rate than the aforementioned 4% SA interest rate.
However, surpassing the 4% risk-free rate can be challenging, and many Singaporeans fail to do so. In fact, between 2015 and 2019, 52.6% of Singaporeans who attempted to invest their OA funds to exceed the 2.5% interest rate were unsuccessful.
Attempting to surpass the 4% SA rate will be even more difficult.
It is important to note that in the CPF Investment Scheme – Special Account, investing is only possible once the minimum amount of $40,000 in your SA has been attained.
How Can I Top Up My CPF Special Account (SA)?
By Cash (most direct approach)
You can make voluntary cash contributions to your CPF SA account at any time, whether you have extra cash available or wish to deposit a lump sum from annual bonuses or cash gifts.
Cash top-ups enable you to earn interest even if you are not employed or not receiving regular CPF contributions.
It’s crucial to note that there is a CPF top-up limit, calculated by subtracting the mandatory annual CPF contributions from the CPF Annual Limit of $37,740. It is important to consider this limit before making contributions since any amount above it will be refunded without interest accrual.
By Transferring From Your CPF Ordinary Account (OA)
Another way to boost your CPF SA balance is to transfer funds from your CPF OA to your SA, which should be done before reaching 55 years old when the two accounts are merged into the Retirement Account (RA).
This method may be beneficial because the CPF SA offers a higher interest rate (4%) than the CPF OA (2.5%), potentially resulting in more funds available for retirement.
Even a small interest rate difference of 1.5% between the two accounts can result in thousands of extra dollars earned if the funds are transferred
To calculate the difference between the amount earned by leaving your funds in the OA versus transferring them to the SA, you can use the CPF calculator.
Transferring funds from your OA to SA offers several advantages, including:
- Higher interest rate and more money earned for retirement
- The SA interest rate beats inflation, which historically has been below 2% in Singapore
- A guaranteed return that is not tied to Singapore’s economic performance, making it a safe investment option
- CPF savings are protected from creditors in the event of bankruptcy, adding to the safety of CPF SA
- CPF SA can be used for investing in approved investments under the CPF Investment Scheme once you have a balance of at least $40,000, with any profits going back to your SA for withdrawal at age 55
- Transferring funds from your OA to SA can help protect your CPF savings. Read our CPF Shielding Hack here. https://treeofwealth.sg/full-guide-to-the-cpf-shielding-hack-all-you-need-to-know/
Points to consider before transferring from OA to SA
While transferring funds from your OA to SA may seem like a great idea, there are some important factors to consider before taking any action:
- The transfer is permanent and cannot be reversed. It is crucial to have a cash emergency fund in case you need immediate access to funds.
- Funds transferred to SA are locked and cannot be used for a house down payment. Therefore, if you plan to buy a house, you will need to save up cash or obtain a bank loan.
- The funds in your SA cannot be used to finance any educational expenses, which means you will need to rely on bank loans or save cash in advance.
- Although the earnings are guaranteed, the interest rates are not. Beware that interest rates can change in the span of 20-30 years.
- Transferring money from OA to SA does not offer any tax relief unless you top up with cash.
If you are considering contributing more to your Special Account, you may be wondering if it is worth it. Along with the benefits of transferring funds from your Ordinary Account to your Special Account, there are other advantages to contributing more to your SA, including:
- Stable and guaranteed returns, which is beneficial if you have a low-risk tolerance and prefer certainty over volatile stock market investments.
- The CPF Special Account interest rate outperforms inflation and many other investment options.
- Your money in your CPF SA is safe and protected from creditors if you go bankrupt.
It is important to consider the downsides of contributing to your CPF SA:
- Your funds are locked in until you reach 55 years of age, with no exceptions even for emergencies, unlike the SRS account which allows for penalty withdrawals in certain cases.
- Both cash top-ups and transfers from your Ordinary Account to your Special Account are permanent and cannot be withdrawn.
Before deciding to make voluntary contributions or transfers to your Special Account, it is important to carefully consider these factors and weigh them against the benefits.
The CPF SA has numerous benefits, such as its low-risk nature, guaranteed returns, and high-interest rate, making it an excellent option compared to the volatile investments available in the stock market.
Despite its drawbacks, the main one being the inability to withdraw funds, the CPF Special Account remains a secure choice for individuals looking at long-term retirement planning.
Ultimately, how much to contribute to your CPF SA should be based on your individual circumstances, risk tolerance, and disposable income. However, most individuals are better off making consistent, smaller contributions rather than putting their entire life savings into their Special Account.
If you would like professional advice on how to strategize your contributions, get in touch by filling the form below to be connected with a financial advisor at no cost.
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