Last Updated on by Tree of Wealth
If you’re reading this, you’re most likely approaching your 55th birthday and wish to know more about CPF shielding and how to execute this hack.
So, let’s dive right into it.
What is CPF Shielding
Before going into CPF shielding, you first need to understand how the CPF system works. Prior to turning 55 years old, you have three CPF Accounts:
- Ordinary Account (OA) – For housing, investment, and insurance (2.5% interest)
- Special Account (SA) – For old age and investment (4% interest)
- MediSave (MA) – For hospitalisation expenses and approved medical insurance (4% interest)
At 55 years old, a fourth account called the Retirement Account (RA) will be created and used to set aside the Retirement Sum. CPF Board will then transfer all your savings from your SA into your RA once you reach 55 years old by default. The amount transferred is up to the Full Retirement Sum (FRS) of your cohort. If there isn’t enough in your SA, the remaining balance will be taken from your OA.
CPF shielding happens when you “shield” your SA savings from being transferred to your RA. Instead, you use your OA savings, which allows more of your CPF money to earn 4% rather than 2.5% interest.
How Do You Perform CPF Shielding
CPF Shielding is done via the CPF Investment Scheme (CPFIS), which allows you to invest both your OA and SA savings. Only the first $20,000 in your OA and the first $40,000 in your SA cannot be invested/shielded.
To ensure your SA savings are “shielded”, you must invest all your SA savings above the first $40,000 before you hit 55 years old. Once you hit 55 years old, the CPF Board will take the balance from your Ordinary Account to form the FRS instead as your $40,000 is insufficient to make the FRS.
Instructions for CPF Shielding
Let’s assume Mr Tan wishes to do CPF SA Shielding before his 55th birthday this year in 2022. His birthday falls on 1 Jul 1967 and he has these amounts in his CPF:
- OA: $146k
- SA: $260k
- MA: $130k
He must follow the instructions below.
CPF Shielding Preparation Steps For Mr Tan
- Open a CPF Investment Scheme (CPFIS) account with a local bank, such as DBS or UOB.
- Open an online trading account, such as FSMOne, dollarDEX, or Philips POEMS.
- Determine which low cost, high liquidity fund to buy, such as the Nikko AM Shenton Short Term Bond Funds.
- Place a few small buy and sell orders of the fund using the SA to familiarise himself with the process and the timeline.
CPF Shielding Steps For Mr Tan
On 28 June 2022:
- Determine the Shielded Amount ($260k – $40k = $220k) he wants in his SA.
- Place a buy order of the Shielded Amount ($220k) on his trading account. He must select CPFIS SA as the payment method.
On 29 or 30 June 2022 (depending on the brokerage’s trading hours):
- Check that the Shielded Amount ($220k) is deducted from his SA.
- Buy as much units of the fund as he can using his Shielded Amount ($220k).
On 1 July 2022 (55th birthday):
- His RA ($186k) is automatically formed using the Mandatory Amount ($40k) left in his SA and the Remaining Balance ($146k) from his OA.
- Log in to the CPF website and confirm that the RA is formed.
- Cash out by placing a sell order of his allocated units of the fund bought.
On 4 July 2022:
- Sales proceeds are credited to his SA.
- Calculate the shielding profit or loss (sell price on 1 July – buy price on 28 June).
- Top up cash to his RA to earn higher payouts under the CPF LIFE scheme.
Do note that CPF shielding is NOT endorsed by the CPF Board due to the risks involved, which will be explained below.
Pros of CPF Shielding
Earn higher interests: As we all know, SA has the highest interest of 4% compared to the rest of the accounts. Unfortunately, there is no way you can top up your SA again after you turn 55 years old. The amount will go to your RA instead.
For example, the extra interest Mr Tan gains each year from his shielding is $2,190 ($146k x 1.5%). This interest earned only grows bigger if your initial SA amount is larger.
Cons of CPF Shielding
Possibility of trading loss: The market may be rather volatile, especially during this period where there is an outbreak of war between Russia and Ukraine. To mitigate volatility risks, try to keep the holding period of your funds to be as short as possible – preferably less than 5 trading days.
Not being able to trade properly: Some less tech-savvy individuals may have trouble going through the process of opening their CPFIS trading accounts and trading, resulting in large losses compared to simply leaving their savings in SA instead.
Not enough SA balance: Individuals with low CPF savings should not perform CPF shielding as there is not much excess SA balance after deducting the Mandatory Amount ($40k). In this case, CPF shielding is not worth the hassle.
Will The CPF Shielding Hack Ever Be Banned?
While CPF is aware of many individuals doing the “shielding”, it is highly unlikely they will ban it because this shielding hack makes use of two CPF schemes that are introduced for different purposes:
- CPFIS: Introduced to allow investment using CPF savings to potentially gain higher returns than CPF’s interest rates.
- Creation of RA: Ensure each cohort has an adequate Retirement Sum (BRS, FRS, and ERS) to tide them through their ageing years.
The only way this shielding hack can be stopped is if CPF bans investing using SA funds under CPFIS or if they require all investments from SA to be liquidated before one turns 55 years old. But, this goes against their schemes’ purposes in the first place and that’s why it is unlikely that the CPF shielding hack will be banned.
However, unlikely doesn’t mean impossible. It is still good for you to be aware of all possible scenarios and plan accordingly for your retirement. After all, to be prepared is half the battle won and the safest hands are still our own.