Singapore's CPF - The Good, The Bad... And The Ugly?

CPF.

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3 simple letters with a profound effect on the everyday working-class Singaporean.

From employer to employee, these 3 letters are often the "source" of joy, pain, and in many cases, confusion.

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From my experience, it's usually because most people only have a vague idea of what CPF is but NOT what it does.

So, after much consideration, I decided to tackle this enormous topic, looking at it from the point of view on what are the benefits this system will bring for the majority of us and how it works for most of us instead of working against us since there is nothing we can do to change it, so why not make it work for us?

The Central Provident Fund (CPF) is a unique social security system developed by our country from the surface level. It is a mandatory savings program with the primary purpose of helping Singaporeans save for their retirement. Its secondary purposes will be for healthcare and housing needs.

It's no surprise then that the CPF system has good and bad aspects from a layman's perspective, with more people likely to focus on the latter.

In this series, my goal is to take a closer look at both sides, and the best way to begin is by first understanding what the different CPF accounts are and what they do.

Pop Quiz: How Many CPF Accounts Does Every Singaporean Have?

As you would know, it is a requirement that every working individual sets aside a portion of their monthly income into their Central Provident Fund (CPF) account. After all, the CPF is a Retirement Fund to ensure most Singaporeans have sufficient financial resources when they reach retirement.

There are four different types of CPF accounts: Ordinary, Special, Medisave, and Retirement.

The Ordinary Account (OA) is the most basic account used for housing, investments, and education.

The Special Account (SA) is explicitly used for retirement purposes.

The Medisave Account (MA) is to be used for medical expenses.

Once an individual turns 55, the Retirement Account (RA) is created by merging the OA and SA for retirement income purposes.

As you can guess, there's too much to cover in one article, so we'll dive deeper into each of these accounts in our next post, and more information about CPF will be covered in our weekly blog posts.

For now, the next thing you need to know is how much goes into each account every month.

Singapore's Unique CPF Allocation Formula

Depending on a person's age, the CPF contribution ranges from 12.5% to 37%.

This percentage comprises two contributions – the employee contribution and the employer contribution.

The actual contribution amount might also change depending on the government's discretion on what is most suitable at a given point in time.

And as an individual gets older, the actual allocation percentage changes. The bulk of it goes to the OA while they're younger, but this majority shifts to the MA in the later years.

Here's a table breakdown of the allocation from CPF:

Source : https://www.cpf.gov.sg/employer/infohub/news/cpf-related-announcements/increase-in-cpf-contribution-rates-from-1-january-2022

Again, do note that this breakdown is subjected to changes.

At the End of the Day, It's All about the Interest, isn't It?

The greatest benefit of growing the CPF account has got to be the higher-than-average interest rates.

The interest rates for each CPF account differ depending on the account, but generally, they're higher than what you can get from your favourite bank.

For a person below 55, the Ordinary Account (OA) earns a basic interest of 2.5% per annum

, which is reviewed every year and may change. The Special Account (SA) and Medisave Account (MA) earn 4% per annum.

The first $60,000 also earns an extra interest.

The only downside of this higher interest rate is that you can't draw it out until you've hit retirement.

However, the money inside can be used for many other necessary expenses, the most common use being public housing.

But housing isn't its only objective. There are many other ways to leverage your CPF once you know about them.

So, Should You Focus on Your CPF?

Well, I think you can guess that I will say Yes to that question.

Unfortunately, there will always be people who choose to look at the compulsory contribution as a reduction in their take-home salary and overlook the long-term benefits of what this system brings to them. After all, immediate benefits are what appeal to most people.

With the recent changes in the CPF system, there has been much online debate about whether the CPF is still relevant and beneficial to Singaporeans.

I hope to address some of these concerns in our next post, or if you have any questions, do let me know as I prepare the next topic.