Last Updated on by Tree of Wealth
Planning for your retirement is a daunting task, and there are many factors to consider when planning for your golden years. This makes it important to understand CPF LIFE, which is the default retirement plan for Singaporeans.
This is where CPF Lifelong Income For the Elderly (CPF LIFE) comes into play. CPF LIFE is a national insurance scheme that provides retirees with monthly payouts no matter how long they live.
This article delves into what exactly CPF LIFE is, and how each of the different plans under it works.
What is CPF LIFE?
When you join the CPF LIFE scheme, you need to pay a lump sum premium, deducted from your Retirement Account (RA), and the retirement payouts will continue, no matter how long you live.
You will be automatically included in the CPF LIFE scheme if you fit these criteria:
- Singapore Citizen or Permanent Resident
- Born in 1958 or after
- Have at least S$60,000 in your retirement savings before you reach 65
If you have not been enrolled into CPF LIFE, you are still able to opt in anytime from age 65 to 79.
There are three plans under the CPF LIFE scheme – the Escalating Plan, Standard Plan, and Basic Plan.
Each of the three CPF LIFE plans share common features. First, they will provide you with a monthly payout no matter how long you live.
Next, your RA savings will be used to fund the CPF LIFE premium for your CPF LIFE plan. These premiums will earn you CPF interest rates of up to 6%, and includes extra interest of up to 2% from the Government.
Lastly, when you pass away, your beneficiaries will receive your CPF LIFE premium balance, together with any remaining CPF savings.
However, the intricacies of each plan is different, and each plan provides different types of monthly payouts to people with different retirement needs, and will be explained in the following sections.
CPF LIFE Escalating Plan
Under the CPF LIFE Escalating Plan, members receive payouts that increase by 2% each year. The 2% increase will take place every year in the month that the first payout was made. This is to ensure that members are able to generally maintain their standard of living to combat inflation.
However, instead of matching the payouts specifically to the actual inflation rate each year, the increase is fixed at 2% to ensure that payouts are predictable and stable.
For example, a payout that starts at S$1,000 a month when you are 65 would reach approximately S$1,500 when you are 85.
The CPF LIFE monthly payouts will be paid from your CPF LIFE premium, and when your premium is depleted, you will continue to receive the monthly payouts from the interest that has been accumulated.
To add on, your Retirement Account savings will be deducted as CPF LIFE premium when you join anytime between 65 to 70 years old.
CPF LIFE Standard Plan
In contrast to the CPF LIFE Escalating Plan, the CPF LIFE Standard Plan provides level payouts, and is suitable for people who are willing to cope with rising prices and inflation by purchasing less.
Payouts start higher than the Escalating Plan, but will remain the same for the rest of your life, and will eventually become lower than the payouts from the Escalating Plan.
Under the Standard Plan, all your Retirement Account savings will be deducted as CPF LIFE. When your CPF LIFE premium is depleted, you will continue to receive the monthly payouts from the interest that has been accumulated.
CPF LIFE Basic Plan
The CPF LIFE Basic Plan is a legacy plan that was brought over from when CPF LIFE was first introduced in 2009.
Unlike the CPF Escalating and CPF Standard plans, the monthly payouts under the Basic Plan are lower and get progressively lower when your combined CPF balances eventually fall below S$60,000.
This happens as the extra interest earned on the first S$60,000 of your combined CPF balances is credited to the Retirement Account and paid as part of the monthly payouts. This leads to payouts declining when balances fall.
As part of the Basic Plan, about 10 to 20% of your Retirement Account savings will be deducted as CPF LIFE premium when you join CPF LIFE.
Which is the right plan?
Choosing the right plan for yourself is definitely a daunting task, so here are some general points to consider.
If you are concerned about inflation and your purchasing power declining as the years pass, the Escalating Plan is able to mitigate some of those worries. However, if you are able to cope with the rising prices, the Standard Plan’s level payouts should be sufficient.
All three plans allow you to enjoy payouts for the rest of your life, and any remaining CPF LIFE premium balance will be given to your beneficiaries upon death.
At the end of the day, while the CPF LIFE provides you with a steady stream of money in your golden years, it is also important to ensure that you have other sources of income to tide you through retirement.
There are many other retirement and endowment plans available that complement well with CPF Life.
Read more here: Best Retirement Plans Singapore 2022 – The Ultimate Guide
Or simply drop us a contact below and let our professional partnered Financial Advisory (FA) Advisor get in touch with you to provide non-bias advice.