CPF for dummies (and first-jobbers)

Everything you always wanted to ask about where 20 per cent of your pay cheque is going – answered simply and plainly

Congratulations on landing your first job. You are now officially an adult, with cool adult stuff like a regular pay cheque, after-work happy hour drinks with the team, and a wardrobe that holds more than just T-shirts and hoodies. But all that also comes with the not-so-cool adult stuff. Like being aware of how much you have in your OA, what to do with your SA, when your MA suddenly turns into an RA, how to keep up with the MS, while pondering what on earth a CPFIS is and whether it is contagious.

FYI: Adults love acronyms.

To understand all that, you’ll need to understand what happens to that chunk of your pay cheque (20 per cent, to be precise) that goes into this mysterious entity people call your Central Provident Fund (CPF) account. Why do you need to know this? Because you’ll most probably need it to eventually move out of your parents’ place. You’ll also want to know how to get that money back, but we’ll get to that later.

So for starters, the role of CPF is to ensure you are provided for after retirement, and it is instrumental in providing housing and healthcare. Funds in your CPF account are guaranteed by the Singapore government.

Whoa, hang on! Did you say 20 per cent of my pay cheque?

Yes. But on the bright side, your employer also contributes an additional 17 per cent of your monthly salary each month to your CPF account (as of 1 January 2015). So you’re actually getting a little more in “long-term savings” than you think.

So if your monthly pay is S$2,500, you’re contributing S$500 to CPF while your employer is contributing another S$425.

Ah, okay. So what happens to the money then?
Warning: Here come the acronyms
Your CPF is divided into three different accounts.

Ordinary Account (OA): Money in this account can be used for housing, insurance, investment, and education. The CPF OA grows at an interest rate of 2.5 per cent per annum*.

Special Account (SA): This account provides for long-term needs, and can be used to pay for approved, retirement-related products. Check with your own insurer on how you can best utilise funds in this account. The CPF SA grows at an interest rate of 4 per cent per annum*.

Medisave Account (MA): If you are hospitalised, the relevant expenses can be paid out of this account. It can also be used to pay for approved medical insurance products. The CPF MA grows at an interest rate of 4 per cent per annum*.

The interest rate on your CPF accounts will increase by a further 1 per cent, after you accumulate your first S$60,000 in it (combined across all accounts, including S$20,000 in your OA).

*The CPF interest rate is for July 2015 to September 2015 and are pegged to prevailing market interest rates.

Okay … But which CPF account can I use to buy new shoes?
Erm. None of them. Your CPF funds generally can’t be touched, except for housing, healthcare, and to pay for insurance. You can also use a portion of your CPF money for investment (the CPF Investment Scheme, or CPFIS), but any returns from CPF investments go back into your CPF account, not your bank account. Invest wisely: Losses made from CPF investments will not be replaced by the government. Also, you’re not going to be able to see some of this money till you’re 55.

Ooh, what happens when I’m 55?
When you reach 55, a Retirement Account (RA) will be created and savings from your SA and OA will be transferred to this RA to form your retirement sum. This will be used to buy a CPF LIFE annuity to provide you with monthly payouts for life, from the age 65 (the current payout eligibility age).

Those who turn 55 in 2015 can also withdraw a portion of savings from their OA and SA as long as certain requirements are met. However, seeing that you’re just starting out in your career, we’ll avoid going into the finer details of the current withdrawal amounts or requirements as they might not even be relevant by the time you’re ready to retire. The important thing to note is that you will probably not be able to take all of your CPF funds out at 55 and therefore should consider making sufficient investments now so that you don’t just have to depend on your CPF to be financially comfortable in the future.

So you’re saying that if I just depend on my CPF it won’t be enough for me to enjoy my life when I’m done working for other people?
It totally depends on your wants and needs. Some of you may feel that your CPF contributions will sufficient to tide you through your later years in life. Others might desire living a little larger in their older years.. There is no right or wrong answer – only your answer.

Remember though, a critical factor to consider is that dreaded inflation rate risk. The prices of goods go up with time, and a dollar today will not be worth a dollar in the year 2060. This is why in your grandparents’ day, a stick of satay could cost two cents, or a pair of good shoes went for S$5. For five bucks today, you’d be lucky to get a decent meal at a mall’s food court.

Now I have to worry about acronyms and inflation? Come on!
Yup! Welcome to adulthood, where backaches, high blood-pressure and inflation await!

In Singapore, the inflation rate is around 3 per cent per annum. Note that most bank accounts will, on average, only provide 0.125 per cent interest on your savings, so just leaving money in your bank account isn’t going to cut it.

At an OA rate of up to 3.5 per cent, the CPF gives you a slight lead against inflation. If possible, try to complement what you are accumulating in CPF with a good insurance plan that you get into earlier in the game. Speak to a financial advisor to make sure you’re on the right track. There are many different insurance endowment plans out there, some of them may even provide returns of around 5 per cent per annum. That means with an early start and combined with the CPF interest you’re already getting, you could be less concerned about inflation rates than you are about the inflation of your waistline when you’re 55.

And now you know CPF. Achievement unlocked.

Source: Today 17th October 2015

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